Inflation fears all rolled up in tortilla prices

Mexican President Felipe Calderon has tens of thousands of soldiers burning marijuana fields and conducting roadblocks to quash spiraling drug violence. But Mexico’s biggest threat may be a lot closer to home.

The rising cost of tortillas, eggs, sugar, milk and other staples are creating anxiety among economists that price increases may get out of control. A drug war, they say, will be an easy problem for Calderon compared with the prospect of inflation, which Mexico grappled with during the 1980s and 1990s.

“Everybody here on Wall Street is crossing their fingers,” said Alberto Bernal-Leon, an analyst at Bear, Stearns & Co., a New York investment bank. “The problem is that, unfortunately, there is nothing Calderon can do.”

Mexico’s central bank announced Thursday that the consumer price index continued to rise at higher-than-hoped-for levels in January, equal to about a 4% annual rate of inflation and surpassing the government’s 3% target for this year.

Prices have cooled slightly since December, the central bank said. But experts worry that supermarket price shocks could trigger a race among other merchants to boost prices.

If retailers and consumers expect prices to go up, Bernal-Leon said, they will. “Expectations are contagious, and the longer we hear about this issue, the more people are willing to increase prices,” he said.

In the last few days, the cost of newspapers, beer and movie tickets has gone up. A new tax has bumped up the price of cigarettes. And workers are demanding higher salaries to keep pace.

Tens of thousands of people marched last week in protest, demanding price controls on basic foods and an increase in the minimum wage, which is less than $5 a day.

“Every day we have less,” said Jesus Pineda Bojorquez, a 72-year-old auto mechanic. “The prices of tortillas, lemons, red tomatoes, onions, green tomatoes, they’ve all gone up. The government is trying to limit tortilla prices at 8 1/2 pesos, but a month ago they were 6 pesos.”

Inflation was the big dragon slain in Mexico’s new era, which began in 2000 with the first election of a president from the opposition party in seven decades.

In last year’s presidential campaign, Calderon asked voters to continue the free-market policies that began during the six-year term of his predecessor, Vicente Fox.

Fox, who failed to bring promised job growth and economic reforms, managed to deliver for the first time in decades a stable peso and relatively modest price increases. That stability gave middle-class and aspiring middle-class families a chance to build credit histories, open savings accounts and buy cars and homes.

Those achievements marked a dramatic recovery from a devastating 1994 peso devaluation that sapped savings and consumer spending.

The latest surge in Mexico’s consumer price index, triggered in December by increases in the cost of tortillas, threatens those gains at the start of a presidency won by a slim margin in July.

The head of the central bank, Guillermo Ortiz, has said he will raise interest rates if the inflation threat continues. Higher interest rates would put a damper on investment and Calderon’s promise to be Mexico’s jobs president.

Inflation also would be a bitter pill for voters apparently convinced by Calderon that electing his rival, leftist Andres Manuel Lopez Obrador, would have triggered escalating prices.

“Clearly, this is creating disenchantment and confusion among people, even his supporters,” said political analyst Juan Antonio Crespo. “Whatever popular support he gained battling drug smugglers fell with increases in the price of tortillas. If he doesn’t resolve or control this quickly, it’s going to be a disaster for the Calderon government.”

Although Calderon negotiated a voluntary price cap on tortillas last month, the circumstances surrounding the price increases have given plenty of ammunition to Lopez Obrador supporters, who are critical of Calderon’s open-market policies.

The two Mexican firms that control the country’s wholesale corn market say price increases followed increased global demand by ethanol fuel producers in the United States.

Few are buying that explanation because tortillas and ethanol use two different kinds of corn.

“The increases in the international corn market do not justify the tortilla hikes in this country,” Calderon said after the wholesalers, large retailers and an association of storefront tortilla makers agreed to a three-month price cap.

Mexican farmers last year had a bumper crop of the white corn used in tortillas, spurring a government investigation of allegations of price fixing. A year ago, a pound of tortillas sold for less than 25 cents; it’s now about 38 cents and up.

“Calderon said he’s going to stabilize prices, but when?” asked Alma Rosa Juarez, a 45-year-old secretary. “I sure don’t see it. I eat lunch at a fast-food place that used to cost me 20 pesos, and now it costs me 32 pesos. That’s money I used to pay for movies. I don’t go now.”

Roberto Sanchez, 37, drives a taxi to support his wife and two children, ages 1 and 5. The couple were thinking of having a third child. Not anymore.

“Everything is going up, but the price of milk has affected us the most,” he said. “Powdered milk used to cost me 132 pesos, and it’s gone up 10 pesos. I only make 150 pesos a day. As soon as my kids get a little older, I’m going to have to put my wife to work.”

sam.enriquez@latimes.com

Times staff writer Marla Dickerson and Cecilia Sanchez and Carlos Martinez of The Times’ Mexico City Bureau contributed to this report.

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Average price increases

in Mexico City for various staples, from January 2006 to last month:

46%

Eggs

40%

Tortillas

26%

Sugar

15%

Rice

Source: Mexican Department of Agriculture