Inflation in Mexico is now lower than in the United States — why that's such a big deal: A perspective from our CEO

Inflation reduces the value of money, makes planning and investment harder and can destabilize an economy if it is high or unpredictable for long. The central banks of governments often set "target inflation rates." The United States has a target inflation rate of 2%; Mexico 's is 3%. These targets help individuals, businesses and investors plan accordingly based on the expected inflation rates in each country.

Over the past 50+ years, Mexico has always had higher inflation than the U.S., except for a period of several months in 2022 during the COVID-19 post-pandemic period when inflation rapidly increased in both countries.

For a few months in 2022, the U.S. had inflation of 8.0% compared to Mexico 's 7.9%. Other than that, inflation has never been lower in Mexico. Until now . The most recent inflation data from each country, published just this past week, has Mexican inflation at 3.37% and U.S. inflation at 4.2% . I nterestingly enough , Mexico's inflation rate is currently trending down, while in the U.S., it is trending up.

For added context, in the decades before the early 2000's, Mexico always had much higher inflation than the U.S., oftentimes at least 10% higher. During the decade of the 2000's, this gap lowered to about Mexico being 5% higher on average each year. In the 2010's, it lowered further to Mexico being about 3% higher on average each year. Since the pandemic, the gap has narrowed even further to the situation today in which Mexico actually has lower inflation than the U.S. by almost a full percentage point.

So why should we care? And what could this mean? When one country runs persistently higher inflation than another (as Mexico has done for decades versus the U.S. until now), it tends to end up with a weaker currency, higher interest rates, more volatility and a long-run loss of competitiveness and real incomes relative to the lower-inflation country . It is worth re-reading the previous sentence and thinking about it in the context of Mexico and the U.S. over the past decades.

Mexico has, in fact, almost always had a weaker currency than the U.S. (which made Americans feel "relatively wealthier" in Mexico and made Mexicans feel "relatively poorer" in the U.S.). Mexico has always had higher interest rates and more interest rate volatility (making individuals and businesses less likely to invest due to higher risk factors). And i n part due to this difference in inflation rates , Mexico has continually had a long-run loss of real incomes relative to the U.S. The per-capita GDP in Mexico is still only about 1/7th of what it is in the U.S. and in fact, it has not improved from what it was decades ago! The relatively higher inflation in Mexico decade after decade , along with factors like lower productivity and lower rates of fixed investment, is in large part what is responsible for Mexicans' inability to increase their wealth.

To illustrate, let me provide a very simple example. Imagine that inflation is 6% and wage growth is 5%. In that case, the average worker actually has lost purchasing power, and in effect is 1% poorer than they were a year earlier. Now imagine a scenario where inflation is 3% and wage growth is 4%. In that case, the average worker has gained purchasing power and, in effect, is 1% richer than they were a year earlier. The first example is almost always what has happened in Mexico year after year. The second example is almost always what has happened in the U.S. year after year. Until now. The U.S. right now is experiencing a decline in purchasing power (inflation is higher than wage growth), while Mexico right now is experiencing an increase in purchasing power (wage growth is higher than inflation).

It's important to note that there are many, many factors that go into exchange rates, interest rates and economic data . Oil prices, war and policy changes can all quickly change economic outlooks and reverse trends . That being said, I think it is worth noting that Mexico has achieved lower inflation in spite of the Trump tariffs and the oil and other commodity price increases as a result of the Iranian and Ukrainian wars.

Mexico right now is in fact demonstrating impressive fiscal discipline. The country's latest level of government debt to GDP is 45% and trending down. In the United States, it is 123% and trending up. Said differently, Mexico's debt burden is relatively low and decreasing, while in the U.S., it is relatively high and increasing. The U.S. currently has a debt ratio that is almost 3 times higher than that of Mexico.

What does this mean for the two countries in the future? No one knows for sure, but it will certainly be fascinating to watch . The team at MND will help you make sense of it all every step of the way!

Travis Bembenek is the CEO of Mexico News Daily a nd has been living, working or playing in Mexico for nearly 30 years.

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