Devaluation Fuels Mexico’s Inflation Woes

The recent free-market devaluation of Mexico’s currency has set off a chain reaction of price increases and wage demands that threatens to accelerate the already-spiraling rate of inflation.

The government is fighting a battle on many fronts against price increases. It is punishing store owners accused of price-gouging, assuring the public that there will be no more surprise devaluations and trying to negotiate moderate wage increases for workers.

Late last week, officials announced a series of special measures, including a reduction of tariffs on imported retail goods, in an effort to quell price rises. The government also promised to maintain subsidies on basic goods to keep their cost from skyrocketing and indefinitely postponed increases it had previously announced in the cost of gasoline, tortillas and beans.

‘Reduction of Pressures’

“It is hoped that these actions will contribute to a reduction of inflationary pressures by diminishing the margins of increases of prices,” said a statement from the Commerce Department.

But with no sure end in sight to across-the-board price rises, Mexicans have begun to think in terms of protecting themselves. They hoard, they buy on credit, they look for sales and they skimp on purchases in the hope of beating runaway prices.

“At this rate, the only thing my Christmas bonus will buy is Christmas dinner,” Irma Meneses, a computer operator, complained the other day. “Maybe we’ll have stuffing--without turkey.”

Even before the recent price scramble, Mexico’s inflation rate for this year was projected at 140%.

The government of President Miguel de la Madrid seems unable to quiet public concern over the state of the economy. Rumors take on the weight of fact, and government announcements to counter them seem to touch off more rumors.

Last week, for instance, an official took the unusual step of announcing that banks would not be closed and that bank accounts would not be seized.

“This made everyone think maybe such steps would be taken,” a government economic adviser said, scanning alarmist headlines in the morning newspapers.

The inflation struggle points up the continuing fragility of the Mexican economy at a time when the long-dominant Institutional Revolutionary Party is trying to build enthusiasm for its presidential candidate, Carlos Salinas de Gortari.

Harsh Reflection

Economic problems reflect particularly harshly on Salinas’ campaign. As a former member of De la Madrid’s Cabinet and an economic expert, he is closely linked to government economic policies.

The crisis began Nov. 18, when the Mexican central bank withdrew its support of the Mexican peso on the free market. The move was made to try to stop a run on dollar reserves that followed a crash on the Mexican stock exchange. Investors who were fleeing the market had begun to exchange their pesos for dollars. The Mexican government decided against letting this drain on dollars continue at the expense of hard-won foreign exchange.

After the central bank’s move, the value of the peso dived 30% in a matter of days. On several occasions, the government tried to convince Mexicans that this did not constitute a “real” devaluation because the decline in the official exchange rate, used for import-export deals, was still under control.

Few Listened

“The freeing (of the peso) does not have to provoke more inflation,” Finance Secretary Gustavo Petricioli said shortly after the devaluation.

Almost no one listened. Stores began to feverishly raise prices to reflect the falling value of the peso. People with dollars withheld them from the market, making it even more expensive to exchange pesos for U.S. currency.

“The Mexican government may measure the value of the peso by the controlled rate, but everyone else measures it by how many dollars they can buy,” a Mexican economist said.

In a counterattack, the government cracked down on businesses that marked up retail prices. The Commerce Ministry has fined and temporarily closed stores in Tijuana, Hermosillo, Chihuahua, Guadalajara and Mazatlan for “speculating with prices,” according to a report last week in the newspaper Excelsior. The heaviest fine was listed as the equivalent of about $250.

In some cases, especially along the border with the United States, stores were fined for pricing goods in dollars rather than pesos.

Businessmen Accused

The government used nationalism as a bludgeon to force merchants into line. Jorge de la Vega, who heads the Institutional Revolutionary Party, accused businessmen who raised prices of being not only greedy but unpatriotic.

The governors of Mexico’s northern states said in a joint statement issued during De la Madrid’s visit last week to Coahuila, a state that borders Texas: “Those who are marking up prices to enrich themselves at the expense of the people are not supporting the actions of the government and are taking advantage of the situation.”

Businessmen defended the higher prices by saying that they are caused by government economic policies.

“The consumer knows perfectly well that neither we nor prices are guilty for shortages, inflation, lower purchasing power and other problems of the economic or social order,” said Sergio Morelos, a representative of the National Chamber of Commerce.

Strike Threatened

Labor unions, incensed at the sudden explosion of prices, are demanding a 46% increase in the minimum wage. Fidel Velasquez, head of the powerful, government-affiliated Labor Congress and the 4-million-member Mexican Confederation of Workers, has threatened to call a massive strike on Dec. 18 if the demand is not met. Government mediators are studying it.

In the meantime, consumers are altering buying habits to cope with ever-rising prices. The adjustments come at a particularly sensitive time for Mexicans just beginning their Christmas shopping.

Rosario Mendoza, 29, a homemaker shopping at the Gigante supermarket in the Polanco neighborhood of Mexico City, told a reporter: “This bath soap costs 290 pesos (about 13 U.S. cents). Just a couple of weeks ago it was 120 pesos. I’m afraid to go look at the price of eggs and milk.”

Consumers interviewed at the Coyoacan market in southern Mexico City said they had cut back on purchases of meat and other foods they regard as luxuries.

Lots of Vegetables

Rosa Maria Olivo, 40, the wife of a truck driver and the mother of nine children, said: “I only buy the cheapest meats--entrails, brains, liver, the heart--and a lot of vegetables. We can’t afford anything else.”

Added Maria de los Angeles Blando, 54, the mother of four children: “We’re going to end up as vegetarians.”

Maria del Carmen Amador, 45, a lawyer, said: “I buy less clothing, less shoes. I don’t even talk about jewelry. Unnecessary things are out.”

Some buyers look for sales and try to stock up or, if they have credit cards, they buy goods before they are needed. By the time they pay their bills, the peso price will have skyrocketed, they figure, and they will have saved the difference.

“I can really save if I combine a sale price with a credit card purchase,” said Gloria de Baez, whose husband is a civil engineer.

Record Spiral

The scramble to control prices is a potential political problem for the government. It has reminded everyone that De la Madrid came into office in 1982 pledging to bring inflation down within two years. Now, with a year left in his six-year term, the country is in the midst of the longest and steepest rise in prices since the Mexican revolution of 1910-17.

Inflation is interfering with the ruling party’s presidential campaign. When the central bank stopped supporting the peso, Salinas was apparently not aware of the government’s policy. When asked by reporters about the move, he was left stammering cliches about how Mexico must move forward.

In mid-December, Salinas is scheduled to take his campaign to the northern border, where the fall in the peso’s value has been especially chaotic. Merchants there are complaining about a lack of dollars to carry on cross-border trade and a lack of supplies to meet the demands of American shoppers who have descended on border cities looking for bargains.

The election is scheduled for July. Given his party’s dominance, Salinas is a sure winner, but continued economic difficulties are considered to be a serious threat to the size of his plurality.