Warning: this argument about inflation in Mexico is not valid

Genevieve Signoret

(Hay una versión en español de este artículo aquí.)

We’ve heard it argued that, because Mexico’s annual core inflation rate (7.3%) is nearly as high as the headline rate (7.7%), then it must be that Mexico’s surge in inflation is being driven by internal demand shocks rather than external supply shocks.

The conclusion may be true, but the argument is invalid. The price of gasoline and diesel is being held down artificially by means of a temporary lifting of the Special Tax on Production and Services (Impuesto Especial sobre Producción y Servicios, or IEPS) on gasoline and diesel. The result is an artificially compressed differential between the headline and core inflation rates.