The welfare assessment that Mexican government implicitly did when it choose not to apply a more aggressive price adjustment on gasoline prices, helping the inflation forecast not to explode is luckily paying back soon. As commodity prices slump, oil has lost around 25% in just six weeks, gasoline prices in Mexico are to converge faster with those in the south border of the U.S.
A closer look to price settings in the last eight months show that Magna Gasoline, the fuel with a greater demand, increased by 4.85%. This rate is considerably lower than the inflation figure for basic goods, which the central bank reported at 6.55% in the same period.
Strictly speaking, there still exists a distortion in relative prices. What should we expect? It is possible to construct a strong case against diminishing distortions effects on prices. It is hard to deny that changes in gasoline prices cause, in a greater proportion, changes in overall prices.
This is equivalent to argue that further increases in gasoline prices will only lead to increases in basic goods’ prices. Why? Taking the recent evidence provided by the fiscal reform of September 07, where the tax burden on gasoline prices was increased, however changes were planned for start in January 08, prices in Mexico jumped in 07’s last quarter.
So, are Mexicans frightened of inflation? Is hard to prove. Yet, it is easier to contrast the slow responses in prices of average businessmen to the introduction of a new tax, the fixed rate entrepreneurial tax, IETU, with the prompt response to a future increase in gasoline prices.
Despite its name, IETU has real and monetary consequences in Mexican’s wealth, even if they are not businessmen. For starters, as any tax in the economy it reduces disposable income whether of firms or individuals. It certainly creates distortions in some prices. This particular tax, for instance, increases the price of future capital relative to current capital boosting physical investment.
A Ricardian equivalence assessment is needed to insure that this distortion exist, however in its short life it has collected revenue under the forecast figure, letting the hypothesis of a bigger investment rate unanswered.
In any case, IETU has not induced firms to raise prices, whereas future gasoline prices did. Government could include in future welfare assessments the long run compared to short run effects of taxes, whether negative or positive. IETU price distortions thus boost Mexican economy, while gasoline negative taxes were unnecessary given the one time response to future gasoline price increases.
A closer look to price settings in the last eight months show that Magna Gasoline, the fuel with a greater demand, increased by 4.85%. This rate is considerably lower than the inflation figure for basic goods, which the central bank reported at 6.55% in the same period.
Strictly speaking, there still exists a distortion in relative prices. What should we expect? It is possible to construct a strong case against diminishing distortions effects on prices. It is hard to deny that changes in gasoline prices cause, in a greater proportion, changes in overall prices.
This is equivalent to argue that further increases in gasoline prices will only lead to increases in basic goods’ prices. Why? Taking the recent evidence provided by the fiscal reform of September 07, where the tax burden on gasoline prices was increased, however changes were planned for start in January 08, prices in Mexico jumped in 07’s last quarter.
So, are Mexicans frightened of inflation? Is hard to prove. Yet, it is easier to contrast the slow responses in prices of average businessmen to the introduction of a new tax, the fixed rate entrepreneurial tax, IETU, with the prompt response to a future increase in gasoline prices.
Despite its name, IETU has real and monetary consequences in Mexican’s wealth, even if they are not businessmen. For starters, as any tax in the economy it reduces disposable income whether of firms or individuals. It certainly creates distortions in some prices. This particular tax, for instance, increases the price of future capital relative to current capital boosting physical investment.
A Ricardian equivalence assessment is needed to insure that this distortion exist, however in its short life it has collected revenue under the forecast figure, letting the hypothesis of a bigger investment rate unanswered.
In any case, IETU has not induced firms to raise prices, whereas future gasoline prices did. Government could include in future welfare assessments the long run compared to short run effects of taxes, whether negative or positive. IETU price distortions thus boost Mexican economy, while gasoline negative taxes were unnecessary given the one time response to future gasoline price increases.
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