Mexico is not a country that one often mentions in the same breath as Argentina. Mexico is a success story and Argentina is a disaster. Mexico’s Central Bank has delivered the lowest inflation rate in the country’s recent history. Prices rose just 4.4% last year. This is a lot less than its target of 6.5% and is even lower than this year’s target of 4.5%. But Argentina is about to undergo a sickening burst of inflation, turning the clock back twelve years to a time when prices rose by the day.
Guillermo Ortíz, the redoubtable head of the Mexican Central Bank, should be credited for his single-minded pursuit of price stability. Interest rates are coming down, the cost of issuing debt overseas is coming down. Mexico issued a $1.5 billion bond this week for 100 basis points less than it paid a year earlier. The government is running a tight fiscal policy and keeping its budget deficit and debt levels within sensible limits.
Argentina blew up because the government never brought its finances under control. It achieved price stability by running up debts instead of financing its budget gap by printing money, the favored deficit financing method in previous years. Argentines are now bracing for a return to the old days.
But Ortiz should watch out – dogmatic fixation on killing inflation could still do a lot of damage by making imports too cheap and putting local companies out of business. There are a few ominous warning signs. A friend of mine in Mexico City tells me that a bottle of imported Heineken beer costs less there than a bottle of locally-brewed Corona.