« The Rocket Monopoly | Main | Medieval Regulations Establishing a Sound Coinage »

Wednesday, October 04, 2006

The Jitomate Crisis

Should the Mexican central bank focus on core price measures - CPI less tomatoes - in setting policy?:

Tomato Prices Put a Squeeze on Mexico, by Marla Dickerson, LA Times: If it were a B-movie instead of an economic threat, it might be called the Attack of the Killer Tomatoes. But a recent Mexican government report isn't joking about the latest menace to the economy. Damaging storms have sent tomato prices ballooning... The rise is crimping shoppers' pocketbooks, stoking inflation fears and upending economic forecasts. ...

[N]o dietary staple can gyrate a nation's consumer price index like Mexico's tomatoes. Government economists are blaming the jitomate ..., as the red tomato is called here, for much of the 0.6% rise in the consumer price index in the first half of September. That's double the increase in the first two weeks of August and much higher than analysts' forecasts.

"I can't recall another country where one food item seems to be so important" in determining inflation, said Gray Newman, head of Latin America research at Morgan Stanley in New York. ... The red scare has so rattled Mexico's central bank that it now projects that 2006 inflation could soar as high as 4%, up substantially from last year's 3.3%, the lowest level in 30 years.

That's making inflation hawks at the institution worry that hard-won gains might be undone by a garden vegetable. And it is likely to complicate their decision as to what to do about interest rates in the weeks ahead.

Mexico's economy is growing at a healthy clip for the first time in years. Lower interest rates would help sustain an expansion that could be weakened by a slowdown in the U.S. economy. But a rate cut could add to inflation pressures.

Although some analysts said the jitomate-led jump in consumer prices is temporary and that Mexico's core inflation remains in check, they said it was a reminder that a diminutive vegetable has an outsize effect on consumer prices here. ...

Similar to citizens of other developing countries, Mexicans spend a larger share of their incomes on food than people in wealthier nations. Food items account for nearly one-quarter of the fixed basket of consumer goods and services that the Mexican government tracks to keep tabs on inflation... So that explains why staples like tomatoes carry more weight in Mexico than they do in a country like the United States...

It's a temporary increase in a relative price. They'll harvest another crop or two before a change in interest rates is fully felt. The central bank should focus on core inflation.

    Posted by on Wednesday, October 4, 2006 at 02:34 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (15)


    TrackBack URL for this entry:

    Listed below are links to weblogs that reference The Jitomate Crisis:


    Feed You can follow this conversation by subscribing to the comment feed for this post.