Photographer: Susana González/Bloomberg

Mexico Gasoline Prices to Surge by the Most in Two Decades

  • Gasoline increase had been limited to 3 percent in 2016
  • Economists raising inflation expectations on gasoline prices

Mexico will raise gasoline prices by as much as 20 percent in January, stoking inflation that’s already running at the fastest pace in almost two years.

A month after the increase is implemented, prices will start to adjust on a daily basis as the government loosens its control of the gasoline market, the Finance Ministry said in an e-mailed statement Tuesday. January’s increase in unleaded gas will be the biggest since November 1998.

The jump in prices risks pushing up inflation at a time when a slump in the peso has already fueled concern about rising consumer prices and led the central bank to raise interest rates five times this year. It is a risk Mexico is willing to take as the government gradually lifts controls over gasoline prices to open the fuel market to private development, a move made possible by a landmark energy overhaul in 2013.

"This will have a very significant impact on inflation," Luis Adrian Muniz, an analyst at Vector Casa de Bolsa, calculating the price hikes will add 0.80 percentage point to the consumer price index in January. "This will hit the consumer sector and the economy."

The five-year breakeven rate, a bond market measure for inflation expectations, soared on Tuesday to 4.7 percent, the highest level since at least 2012, from 3.2 percent before the Nov. 8 election, when Donald Trump’s surprise victory sent Mexico’s currency tumbling.

‘Gasolinazo’

The surge in prices, which newspapers call in Spanish a "gasolinazo," meaning a fuel price slam, came with warnings by the government against gas stations hoarding fuel. Gasoline shortages have swept several states across Mexico in recent days due to illegal taps of pipelines, while officials accused some stations of under-reporting their supply. The state-owned oil company Petroleos Mexicanos has tweeted safety warnings against drivers storing fuel in their homes.

Citibanamex in a research report last week predicted gasoline prices could increase 22.5 percent on average in 2017 as the liberalization plan is implemented. That would push up inflation almost one percentage point, said bank analysts, who are already forecasting that consumer prices will increase 4.8 percent next year. The central bank targets inflation at 3 percent.

The increase comes after a year in which the government limited monthly gains in gasoline prices to an annual 3 percent. Aside from a jump in August, prices mostly held steady as a result.

"Inflation might rise sharply in January," Barclays Plc chief Mexico economist, Marco Oviedo, said in an e-mailed response to questions. "We might see some second round effects later."

Keeping Calm

The impact of fuel prices on inflation will be moderate and temporary, Deputy Finance Minister Miguel Messmacher said in an interview on Radio Formula. Barclays’s Oviedo also said that while prices could rise to close to the upper band of the central bank’s 2 percent to 4 percent target range in January, secondary effects on inflation will probably be contained as competition will help keep costs to consumers somewhat in check.

Removing subsidies will benefit the finances of both the government and Pemex, which will no longer bear the brunt of keeping fuel cheap for customers, according to Vector’s Muniz.

The average price for unleaded gasoline will climb 14 percent to 15.99 pesos per liter in January from December, the Finance Ministry said today. The price for premium gasoline will increase 20 percent to 17.79 pesos per liter over the same period, with diesel rising 16.5 percent to 17.05 pesos per liter.

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