Mexico Inks Deal With Top Companies to Tame Rising Inflation

(Bloomberg) -- Mexico's government has struck a deal with leading companies to temporarily cap prices on 24 food and other basic products in an effort to temper inflation that has surged to two-decade highs.

The plan, which was first reported by Bloomberg News last week, will initially last six months and includes the reduction of tariffs of some food products to zero to ensure ease of imports, Finance Minister Rogelio Ramirez de la O said during a press conference at the National Palace on Wednesday.

The price pact with companies includes items such as rice, onions, eggs, chicken, milk and potatoes. It will affect about a third of the country's inflation components when combined with Mexico's ongoing fuel subsidies and other energy price-reduction policies, Ramirez said.

“This is not a price control. It is an agreement, an alliance, to guarantee that the basic basket of food items has a fair price,” President Andres Manuel Lopez Obrador said at the event, standing on stage in front of company executives participating in the deal.

Lopez Obrador said retailers such as Grupo Comercial Chedraui SA and Organizacion Soriana SAB will participate in the agreement together with telecommunications giant Telefonos de Mexico SAB, while executives from Wal-Mart de Mexico SAB and Grupo Bimbo SAB pledged their support. The government also plans to boost grain production by 2 million tons and to use its tree-planting program to increase the supply of food by 800,000 tons, the finance minister said.

The deal echoes pacts made by the government in the 1980s and 1990s that were seen as having helped slow double-digit inflation in a much more closed economy. Mexico's inflation accelerated to 7.72% in early April, driven by food, gasoline and vacation costs.

These measures are “positive developments” but have their limits, Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., said in a note Wednesday. Voluntary price agreements tend to be ineffective beyond the short term to keep inflation at bay as they create distortions and lead to larger increases later on, he said.

“The announced measures are no substitute for a conservative calibration of monetary and interest rate policy to deal with the challenges of high and disseminated inflation,” Ramos wrote.

The price pressure is becoming a political headache for the Mexican government given its impact on consumers and has led the central bank to boost interest rates in each of its meetings since June.

After announcing the deal, Lopez Obrador said that the government needs to do what it can in order to create conditions that would limit interest rate hikes. The fewer rate increases the better, he said, as lower rates help promote investment and economic growth in the country.