War in Ukraine could drive inflation to 10%, economist warns

Inflation could increase to close to 10% by the end of the year if inflationary pressures – some of which are related to the war in Ukraine – persist throughout 2022, according to the chief economist at Banco Base.

Annual inflation rose to 7.28% in February from 7.07% in January, according to data published Wednesday by the national statistics agency INEGI.

Russia’s full-scale invasion of Ukraine, which began on February 24, is causing prices for some raw materials to rise, which could lead to higher inflation in Mexico.

Bank of America Securities (BofA Securities) has warned that fuel prices in Mexico will increase as a result of the invasion, and has adjusted its end-of-year inflation forecast to 6% from 5%. Banco Base upped its end of 2022 outlook to 5.5% on Wednesday.

That bank’s chief economist, Gabriela Siller, warned that price increases could exceed that forecast, noting that two weeks after the war in Ukraine began, there is a high level of uncertainty with respect to inflation.

“The inflation forecast for the end of the year could be revised toward … 8% if similar inflationary pressures to those seen during January and February are seen between March and June,” she said.

Higher global demand for goods during pandemic-related supply chain disruptions have already fueled inflation, which is currently more than double the Bank of México’s target rate of 3%, give or take a percentage point.

“If the inflationary pressures persist until the end of the fourth quarter, the risk rises that … annual general inflation will approach 10%,” Siller said.

Mexican bank CIBanco also warned of the possibility that higher inflation will be seen due to the higher costs of raw materials including oil.

“In the short term (the end of the second quarter or start of the third) it cannot be ruled out that … [inflation] could approach 8% annually,” it said, noting that such a rate would be the highest since 2000. The bank said that it didn’t expect to see inflation within the central bank’s target range until 2023.

Bank of México board member Jonathan Heath said on Twitter Wednesday that data indicated that core inflation hadn’t peaked in February and will therefore continue to rise. He also said that the conflict in Ukraine will clearly place upward pressure on inflation.

“High inflation will be more persistent than we had anticipated, both in Mexico and at the global level,” Heath wrote.

The latest inflation data raises expectations that the central bank will continue to increase its benchmark interest rate, which is currently 6%.

“We expect that the Bank of México will lift [rates] 50 basis points in March, May, June, August and September and then return to 25 basis point increases in the last two meetings of the year in November and December,” BofA Securities said.

That would leave the central bank’s benchmark rate at 9% at the end of the year.

BofA Securities is forecasting growth of just 1.5% for the Mexican economy this year, and acknowledged that there are downside risks to that prediction.

It said that higher oil prices – Mexican crude reached its highest price since 2008 on Tuesday – will result in higher revenues for Pemex and other producers, but warned that consumers and the government will spend more on gasoline, the latter due to greater spending on subsidies to limit the price increases at the pump. Motorists would thus be left with less money to spend on other consumer products, which would adversely affect overall growth.

With reports from El Universal and Milenio