Mexico fights inflation with trains, planes, and instant coffee
Higher minimum wages are only one side of the living standards coin.
Unaffordability has emerged as the common factor in the fall of governments across the world. Indeed, Trump’s second term in the US or the rise of Milei in Argentina can trace their roots in part to a generalised rise in the cost of living.
The Mexican government has been heralded, in contrast, for having kept living standards rising in the years after the pandemic. Much of the credit has been rightly afforded to president Andrés Manuel López Obrador’s (2018-2024) doubling of the minimum wage. At the time, critics feared that a flood of demand from newly enriched working Mexicans would raise prices and cancel out their newfound gains.
This did not come to pass. An absence of price rises was not an accident though. A multi-faceted policy of inflation reduction is the other side of the coin when it comes to Mexico’s growing living standards. It is one which president Claudia Sheinbaum has taken to the next level in her year in office.
These are the three ways in which she has produced a successful anti-inflationary strategy, rejecting both the right’s free market laissez-faire economics as well as overbearing price controls of left-wingers past.
Cooperation
Covid-19 brought with it the twin shocks of shortages and inflation, as supply chains were shaken and undermined by the pandemic. In response the López Obrador government announced a Package Against Inflation and Shortages (PACIC, as it is known in Spanish) in 2022.
PACIC consisted chiefly in a series of governmental agreements with the private sector which would seek to keep Mexico’s basic goods basket—officially registered at 24 products including eggs, pork, beans, and chillies—at a constant price.
At its core, what López Obrador was asking for and what Sheinbaum has continued to request is for “solidarity” from the private sector. In exchange for not raising their prices, certain concessions have been afforded, including a freeze on freight and toll road fees, as well as tax breaks for petrol suppliers who have agreed to keep prices steady at the pump.
It has paid off. Demand has grown as salaries have increased but prices have not risen rapidly. Moreover, most companies have overall done well from this deal, as sales have boomed. Yet, for a few, solidarity has at times come at the expense of profits. What keeps these corporations from breaking ranks is a bit of stick alongside the governmental carrot.
Just as the government has given tax breaks, it has also suggested that Sheinbaum’s pledge to not put up taxes could come under strain if they don’t play ball. The closing of a tax loophole saving private banks billions every year came on the back of the sector’s refusal to budge on the government’s petition to lend more. Coercion can only get you so far though, and Sheinbaum—who is still desperate to attract investment into the country—has other reasons to keep tax raises off the table.
Overall, cooperation with the private sector has been most successful in sectors where Sheinbaum maintains close relations with the oligopolists that control the market—like with Mexico’s tortilla corn millers—or where the State is already an important or emerging economic player.
Competition
The Sheinbaum administration is more or less doing the opposite from what the liberalising governments of the 80’s and 90’s did when facing high inflation, said Mario Campa, a political and industrial economist, formerly a consultant at the International Labour Organization. Whereas previous governments sought to keep salaries low to keep demand down, the current one is working to grow supply.
Sheinbaum understands that it can’t replace the private sector—which makes up over 80% of Mexico’s investment—so her government instead focuses on trying to free up bottlenecks in strategic sectors and to increase the production of affordable basic goods. It has already set up a chocolate and an instant coffee factory, with an eye to both providing Mexican producers with a fair price for their crops and offering Mexican consumers a fair cost for the final product.
Sometimes it isn’t even about increasing production but rather freeing up existing supply. Mexico is a country of monopolies and oligopolies who act as cartels, carving up the domestic market by regions of other agreements to keep profits high at the expense of customers. Instead of trying to regulate these practices away, the government is instead seeking to compete with these firms directly.
The government has launched a mobile services provider to offer cheap and basic cellphone access to Mexicans in a market controlled by two companies. The reintroduction of passenger trains, the nationalisation and revival of an old airline, and the establishment of government-run airports charging at lower Airport Use Fees (TUA) are all meant to break oligopolistic practices in transport.
All of this takes time to take effect, though. Commuter trains have yet to materialise, Mexicana—the resurrected State-run airline—is still waiting for planes to arrive from Brazil, and the government currently only runs two of Mexico’s 78 airports—Tulum and AIFA, on the outskirts of Mexico City. Meanwhile, the State-run cellphone service controls just about 2% of the total mobile connections in the country.
Needless to say, Sheinbaum is still far from replacing Nestlé or Carlos Slim’s Telcel mobile company, but this isn’t about the government taking control of the market. “It is at its heart a policy of economic signaling,” Campa told The Mexico Political Economist. By competing on the open market, the government can pressure private companies to not raise their prices. Additionally, the threat of a government incursion into their sector makes the private sector all the more cooperative.
The competitive element is essential here. It works not only to keep companies from overcharging, but also from having State-run companies flag in their product’s quality. “Challenge the market to push down prices rather than quality,” said Campa.
There are challenges to this hands-on industrial policy beyond quality. The enormous amount of resources invested in keeping essential producers subsidised has proven too tempting to some of the government’s less scrupulous officials. The largest corruption scandal to hit the López Obrador administration came when tens of millions of pesos were found to have been syphoned from Mexico’s Food Scarcity Prevention Agency, Segalmex.
Chance
Lower inflation in recent times hasn’t all been the Mexican government’s doing. Sheinbaum has got lucky in some unexpected ways, namely in the form of Donald Trump. Recent figures show that increased tariffs on goods going to the US have resulted in a fall in exports of many essential products.
Agricultural exports overall fell by 14.3% last month, with the biggest annualised contractions coming from tomatoes (falling 26.9%), chickpeas (23.8%), mangoes (14.2%) and avocados (7.9%). Many of these have now had to find a market locally at significantly lower prices.
Trump’s trade policies can change on a whim; Sheinbaum’s continuing anti-inflationary policies seem to be set up for the long haul. And just wait, suggested Campa, the Mexican president is only just getting started.