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Retailers in Mexico offer discounts to fight inflation

FinanceBusinessPricesInflation and DeflationNational GovernmentHeads of StateGovernment

Mexican shoppers got a big new year's gift this year: At the urging of the government, major supermarket chains this month cut prices on 300 popular items, such as powdered milk, rice, meat, eggs, soap and toilet paper. The voluntary Family Assistance 2008 program offers discounts of up to 30% and will run through the end of March.

The effort promises some relief for Mexican consumers who entered 2008 facing higher taxes as well as rising prices for food and energy. It's also a way for officials to appear proactive in fighting inflationary pressures in Mexico's economy.

"Every peso matters," said Sandra Rivera, 39, a mother of three who stopped by a Wal-Mart Super Center in the capital recently to pick up discounted paper towels and cookies.

Although popular with consumers, the program has divided the private sector and is tarnishing President Felipe Calderon's conservative credentials as a free-market champion. His administration faces a revolt from manufacturers, who are at odds with retailers over who should pay for the discounts.

Ismael Plascencia, president of an influential industrial trade group known as Concamin, said the price cuts were predatory, targeting suppliers already squeezed by rising costs and shrinking profits. He said the major supermarket operators, who wield enormous clout, were forcing manufacturers to eat the full cost of the discounts and pay for promotional expenses.

"It was a decision [retailers] took without consulting us, and we're not going to continue putting up with the abuses," he said. "We're going to fight."

But Antonio Ocaranza, a spokesman for Wal-Mart de Mexico, said the program was "a way to help our customers put more in their grocery carts." The nation's largest retailer has slashed prices on 1,000 items at its 445 Wal-Mart Supercenter and Bodega Aurerra outlets.

Plascencia said industry leaders were planning to meet with retailers and government officials today to hammer out a price-cutting formula that all sides could live with. But analysts doubt that the program will have much effect despite all the drama.

"All you're doing is postponing price increases," said Alfredo Coutino, Latin America economist at Moody's Economy.com.

The spat underscores concern in Mexico and other Latin American nations over rising consumer prices in economies that have made enormous strides against inflation in recent years. The region posted an estimated average inflation rate of 5.3% last year -- half of what it was in 2003, according to the International Monetary Fund.

Still, inflation is projected to rise in almost all major Latin economies this year. Strong world demand for oil, metals and agricultural commodities have been a boon for growth. But huge in-flows of capital have stoked inflation, as have big increases in government spending.

Argentina's government, for example, reported inflation of 8.5% in 2007. Some analysts estimate the true rate was at least double that. Venezuela's inflation soared to 22.5% last year, the highest rate in Latin America.

Both countries have imposed price controls on some goods and services in a bid to curb inflation. That in turn has fueled shortages and speculation in products such as milk and meat.

Mexico ended 2007 with inflation of 3.8%, one of the lowest rates in decades and well under the central bank's upper target of 4%. Still, hikes in gasoline and business taxes that took effect Jan. 1 are fueling inflation pressures here. The IMF estimates Mexican inflation will average 4.2% in 2008.

Finance Minister Agustin Carstens has said repeatedly that inflation was under control. But average Mexicans say they're worried about climbing prices for fuel and food.

"The big preoccupation right now is the cost of living," said Mexico City pollster Dan Lund of Mund Americas. He said the economy, specifically inflation, had supplanted security as the No. 1 concern cited by Mexicans in a monthly poll conducted by the public opinion research firm.

To head off inflation, Mexico's central bank in October hiked interest rates, a move applauded by many analysts. But other anti-inflation measures have been more controversial.

Calderon's administration recently slashed peak electricity rates for businesses, which is estimated to cost about $733 million at a time when the state-owned utility needs funds to invest in new plants to meet rising demand.

His government also temporarily reduced toll-road fees, despite making private investment the centerpiece of its highway-building agenda. And it has persisted in pressing tortilla sellers to honor a deal struck last year to cap retail prices for this staple in the face of unrelenting high corn costs for producers.

"The government continues to deprecate market forces," columnist Sergio Sarmiento recently wrote in the national daily newspaper Reforma. It "considers prices as an instrument of political control."

Some observers give Calderon credit for showing concern for the pocketbooks of average Mexicans, and for trying to curb expectations of higher prices that can feed inflation. Mexico's government in the past has formed pacts with labor and industry to keep prices in check.

But the Family Assistance program might prove to be a costly political gaffe. The measure appears to have blindsided manufacturers, most of whom supported the conservative Calderon in his razor-thin 2006 presidential victory over leftist Andres Manuel Lopez Obrador.

"Right-wing politicians are not supposed to be meddling with price controls," said Rogelio Ramirez de la O, a Mexico City economist who served as Lopez Obrador's economic advisor. "Now companies are in rebellion."

marla.dickerson@latimes.com

Times staff writer Cecilia Sanchez contributed to this report.

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