Increase in minimum wages has a greater inflationary effect than six years ago

The risk that increases in minimum wages in Mexico will generate inflation today is higher than six years ago, because the base of people earning the minimum wage has grown, predicts Luis Gonzali, vice president and co-director of investments at Franklin Templeton Mexico .

Within the framework of the webinar: “Economic and market perspective on Mexico and the world of October”, the specialist from the asset management firm explained that when the last administration began with the increase in the minimum wage, only 10 or 12 percent of the population earned it. Now, 60 or 70 percent earn between one or two minimum wages. Thus, although it is a positive proposal, the signal of increasing the minimum wage of between 10 and 12 percent could generate an inflationary effect, Gonzali warned.

The above is three times more than inflation and therefore the average Mexican will continue to have more money in their pocket in real terms.

“The risk that these increases in minimum wages generate inflation today is higher than six years ago, because today the base of people who earn the minimum wage has grown (…) the majority of people have an increase at salary and its consumption will increase and therefore inflation could increase.”

Information from the National Institute of Statistics and Geography (Inegi) shows that in September two consecutive months of deceleration of this services inflation subindex were completed. However, it has been fluctuating around 5 percent for 26 months.

Pressures on service prices remain high and annual inflation of this component remains persistently above 5 percent, far from its average of the previous 10 years of 3.5 percent.

For his part, Luis Muñiz, deputy director of economic analysis at Vector Casa de Bolsa, explained that behind this high performance in services is the salary part, which has dragged on in the last five years.

“To assert that wage increases, which doubled the minimum wage, have little or no effect on inflation is very risky. Much of what is behind underlying inflation, particularly in services, is closely related to the issue of salaries.

“Even more so when you start from a very low level of salaries and raise them, the contamination that this increase has on the rest of the salaries is small, but as it increases, a greater proportion of the population is subject to the increase.” salary,” Muñiz said.

He added that the increase in minimum wages in recent years is not neutral in inflationary terms. The direct impact of salaries on inflation is not quantifiable; measurements must be made indirectly to know what the effect is; but qualitatively it is behind the persistence of services inflation, which is one of the elements that most worries the Bank of Mexico in achieving its price stability goal.