Inflation, politics could feel heat from Mexico's latest 'Gasolinazo'

Tuesday, January 2, 2018

Turning up the heat on inflation and national politics, Mexico begins 2018 with a new surge in gasoline and diesel prices, a so-called Gasolinazo of around 6.9%, which includes an adjustment for recent inflation and the government's decision to increase the special excise taxes (IEPS) on fuel sales.

The price projections, which would vary by region and roll-out through early January, were reported by Mexican gasoline association (Amegas) via a communiqué to its membership.

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"The 6.9% increase is on average, applied directly to the rates for applicable automobile fuels and fossil fuels listed under the terms of the IEPS law and the federal revenue law," read the Amegas statement.

In response, state-run oil company Pemex issued a statement Tuesday saying the price increases continued to be on a gradual scale and "categorically rejects any speculative comments regarding supposed increases in them."

According to Amegas, starting January 1 Mexicans should expect to see prices for regular and premium gasoline and diesel increase between 56 and 70 centavos (US$0.029 and US$0.036) per liter, moving the average price for gasoline up 57% since President Enrique Peña Nieto took office in December 2012 (as reported in local media outlet El Economista).

Pemex said the formula to determine the price of gasoline and diesel in the wholesale market includes mechanisms that reduce its volatility, and that hence no sudden price increase has taken place.

"As has been demonstrated since its application, the formula guarantees stability, with daily adjustments according to the conditions of an open and competitive market, as happens in the rest of the world," Pemex said.

"It should be recalled that [Amegas], which represents less than 5% of the total number of entrepreneurs in the sector, has constantly made statements about the prices of gasoline that have been imprecise or even ill-intentioned."

That said, even if the average increase is in fact 6.9%, such a hike would be a far cry from the 20% Gasolinazo seen at the start of 2017. That event sparked nationwide protests, many turning violent, including some deadly incidents and multiple outbreaks of looting at large chain department stores and convenient stores.

As a result of the political and inflationary fallout from the liberalization program that caused last year's Gasolinazo, the government cut the IEPS for fuel prices. However, this managed to slash federal tax revenue during a government austerity drive.

Potential for political, inflationary impact

Now, the increased IEPS will help the government's push to achieve a primary surplus, even as it approaches a presidential election in July. Nevertheless, such macroeconomic responsibility may serve the ruling PRI party little in swaying an already embittered electorate, reflected by the president's abysmal approval ratings.

The jump in prices also applies further pressure on inflation, which took a hard negative turn in 4Q17, driving the central bank to raise the benchmark rate in December with a further February hike now all but certain.