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Monetary policy and inflation frequently asked questions

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Monetary policy

  • How do central banks conduct their monetary policy?

Central banks are the national authorities responsible for supplying currency and implementing monetary policy. Monetary policy is the series of actions taken by a central bank to determine the conditions under which it supplies the money that circulates in the economy, through which it influences the behavior of short-term interest rates.

The goals of monetary policy has been a defining issue for economists and public opinion since central banks were consolidated as entities responsible for providing economies with currency and implementing monetary policy. In line with academic progress and experience on the subject, the understanding of monetary policy has developed considerably over the last few decades.

Today, it is clear in academic circles and among the world’s monetary authorities that monetary policy’s best contribution is fostering price stability. As a result, many countries, including Mexico, have reset monetary policy goals in recent years such that the central bank’s major priority is to ensure price stability. This goal has been formalized by establishing low-level inflation targets.

The central bank does not directly control prices but rather they are determined by supply and demand for different goods or services. However, the central bank can use monetary policy to influence the price-setting process and thereby meet its inflation target. Generally speaking, central banks conduct monetary policy by affecting the conditions under which the economy’s liquidity needs are met. This is done through the conditions under which the central bank supplies liquidity to money market participants, either by changing some headings of its balance or by adopting measures that have a more direct influence on short-term interest rates. In the first instance, this action has an impact on interest rates with other maturities, the exchange rate, and economic agent’s expectations, all of which affect the economy’s price-setting process. These changes in turn affect aggregate supply and demand as well as the price-setting process.

For a more detailed description of how the monetary policy transmission mechanism operates, please refer to the document "The effects of monetary policy on the economy".

 

International reserves

  • How are international reserves defined?

Banco de México’s international reserve headings are specified in Article 19 of Banco de México’s Law. In particular, Banco de México’s international reserves are made up of gross international reserves, which include assets denominated in currencies that comply with that set forth in Articles 19 and 20 of the Banco de México Law, from which liabilities of less than six months are deducted, comprised of deposits in currencies Banco de México receives from the Federal Government, Petróleos Mexicanos, commercial banks and development banks, as well as currencies pending receipt from buy/sell transactions involving local currency and other liabilities in currencies and gold, as indicated in the last paragraph of Article 19 of Banco de México’s Law.

To consult Banco de México’s Law please go to the following link:

Regulations/Legal framework

 

  • What is the current level of international reserves?

Every week Banco de México publishes information on the level of international reserves corresponding to the last working day of the previous week. The information is published in a press release entitled: Weekly Bulletin on Banco de México’s Account Statement, which can be found at the following link:

Información para la prensa/Estado de cuenta semanal (available only in Spanish)

If you would like to consult information on the monthly historical series please go the following link:

Statistics/Monetary policy and inflation/Banco de México/Monetary base/Weekly information/International assets, net domestic credit and monetary base

 

  • What are international reserves invested in?

The Statistics section contains a report which shows a generic breakdown of the instruments international reserves are invested in at the end of each month. The breakdown is based on the methodology governing best international practices.

The methodology defining best international practices can be found in the International Monetary Fund document "International Reserves and Foreign Currency Liquidity Guidelines For a Data Template" at the following link:

http://dsbb.imf.org/pages/sdds/sddsguide.aspx  

To consult the historical series, please go the following link:

Statistics/Monetary policy and inflation/Banco de México/Banco de México's international assets/Monthly information/Data template on international reserves and foreign currency liquidity

 

  • What factors determine international reserve flows?

Every week Banco de México publishes information on the factors explaining the international reserve flow corresponding to the previous week. The information is provided in a press release entitled: Banco de México’s Weekly Account Statement Bulletin and can be found at the following link:

Información para la prensa/Estado de cuenta semanal (available only in Spanish)

If you want to consult information on the historical series of factors determining the monthly international reserve flow, please go to the following link:

Statistics/Monetary policy and inflation/Banco de México/Banco de México's international assets/Monthly information/Information on Banco de Mexico´s international assets

 

CPI

  • What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) is an economic indicator specifically designed to measure the average change in prices over time using a weighted basket of goods and services which represent Mexican urban households’ consumption.

Due to the importance of household spending for aggregate spending in the economy, changes in the CPI are considered to be a good approximation of changes in the prices of goods and services traded in the country.

The CPI is the official indicator of inflation in Mexico. Information on the CPI can be found in the Statistics section of this website or in the Specialized Inflation Portal by clicking on CPI Consumer Price Index and UDIs.

 

  • How is the Consumer Price Index (CPI) used?

The CPI is a statistical indicator that facilitates economic decision-making because it provides the government, companies, unions, and private citizens with information about changes in the cost of living. Different contracts, such as labor contracts, are updated based on changes in the CPI.  Furthermore, changes in the CPI are an important reference for price reviews of different goods and services in the economy.

Besides resorting to other parameters, the authorities analyze the trend in the CPI when formulating fiscal and monetary policy. In particular, Banco de México conducts monetary policy with a view to keeping the local currency’s purchasing power stable.

 

  • How is the Consumer Price Index integrated?

Due to its own information needs and those of economic agents, Banco de México has prepared price indexes since 1927 through June 2011. It began publishing the Consumer Price Index in January 1969. The central bank set vanguard goals and procedures that would help it create the different indexes. In the case of the consumer price index, elements of the current base which guarantee the achievement of the goals specified in its definition were considered: "The National Consumer Price Index (CPI) is an economic indicator specifically designed to measure the average change in prices over time using a weighted basket of goods and services representing the consumption patterns of Mexican urban households". Those elements are:

  • The use of an internationally accepted calculation formula;
  • Representation of all urban areas in the country;
  • Inclusion of all goods and services purchased by urban consumers;
  • Inclusion of the different points of sale of diverse goods and services;
  • Inclusion/study of different brands, presentations and types of goods and services consumed by Mexican households. The end result is:
    • The Consumer Price Index is calculated using the Laspeyres formula. One feature of this formula is that both basket and weights are fixed during the period in which the base is in use. The Laspeyres formula is commonly used throughout the world, including in developed countries, and is recommended by international organizations when preparing price indexes.
    • Mexico’s urban population is represented in the CPI by 46 cities distributed throughout the country, which are grouped into seven geographical regions and classified by size (small, medium, and large). Each Mexican state is represented by at least one city.
    • Mexican households’ spending on goods and services is represented by a basket comprising 283 weighted universal items of goods and services. The National Survey of Household Income and Expenditure (ENIGH, for its acronym in Spanish), which is prepared by the National Institute of Statistics and Geography (INEGI, for its acronym in Spanish), is used to determine the basket and its weights. The weights of the CPI basket’s universal items represent the relative importance of spending on them as compared to total spending.
    • Points of sale were selected for each CPI city based on household’s preferences in each city. Prices at supermarkets, outdoor markets, street markets, convenience stores, price clubs, and department stores, etc. in each city were used to create the indicator.
    • Specific products and services comprising the CPI are selected at points of sale based on consumer preference for certain brands, presentations, and categories.

 

  • Which prices are used to prepare the CPI?

Spot prices are used to create the CPI, including taxes such as VAT (Value Added Tax), the ISAN (New Car Tax) and, generally speaking, any other tax paid by consumers when purchasing a good or service. Reduced prices for goods or services are included as long as they do not depend on/ correspond to sale liquidations. A conditioned sale means that in order for it to be effective another product must be bought or the sale must be related to a package of the same products.

 

  • How often is the CPI calculated and where can I consult the results?

The CPI is calculated every two weeks and is released every two weeks and every month. The monthly index is the average of the month’s two two-week periods. INEGI publishes in the Official Federal Gazette the CPI corresponding to the month in progress, and the second half of the previous month, on day 10 of each month, at the latest. On day 25 it publishes the index corresponding to the first half of the month. INEGI publishes the indicator on its web page the day prior to publishing it in the Official Federal Gazette.

 

  • How can I calculate the inflation rate between two dates?

To calculate inflation between two specific dates using the CPI, the value of the price index on the last known date is divided by the value of the former.

For example, to obtain the July 2006 inflation rate, the index for July 2006 is divided by that corresponding to June 2006; 1 is then subtracted from the result and then multiplied by 100 to obtain the monthly CPI change.

July 2006 CPI: 80.944

June 2006 CPI: 80.723

Change in % = (80.944/80.723 - 1)*100 = 0.27

In this second example, we want to obtain the annual percentage change of the last twelve months ending in July. We must first know the July 2005 and July 2006 price indexes. In this case, the procedure is the same:

July 2006 CPI: 80.944

July 2005 CPI: 78.538

Change in % = (80.944/78.538 - 1)*100 = 3.06

 

  • Which cities are included in the CPI?

Mexico’s urban population is represented in the CPI by 46 cities distributed throughout the country, which are grouped in seven geographical regions and classified by size (small, medium, and large). Each Mexican state is also represented by at least one city.

Cities considered in the CPI (XLS)

 

  • What does universal mean?

Universal is a household spending concept (shirts, for example), consisting of a range of specific products/items determined by different features (composition, type of sleeve, style, etc.).

The universal concept is the minimum category represented and weighted in the CPI. Universal items are made up of specific products.

 

  • Which universal items does the CPI consider?

283 universal items make up the CPI basket of goods and services.

 

  • What is core inflation?

The 283 universal items that make up the CPI basket of goods and services are classified or grouped into subgroups based on specific analytical needs. The most well-known classifications include “by receiver/target of expenditure”, which refers to the sector that originates goods and services, and the durability of goods and core inflation.

Core inflation in particular is a very useful classification when making monetary policy decisions and preparing inflation forecasts, as the goods and services comprising the basket used to measure core inflation are not subject to administrative/government decisions, marked seasonality or strong volatility.

The Core Inflation Index seeks to capture the trend in price changes. As a result, universal items with very volatile prices are excluded from it, namely, farm products, energy prices, and government-authorized tariffs.

For further information on this topic, please consult the CPI methodology note.

 

  • How are UDIs updated?

The change in the value of the Investment Unit (UDI, for its acronym in Spanish) is updated based on half-monthly changes in the Consumer Price Index. The percentage change in the value of the UDI between day 10 and day 25 of each month is therefore equal to the change in the CPI for the second half of the previous month. The change in the value of the UDI between day 25 of a given month and day 10 of the following month is equal to the change in the CPI for the first half of the month. The half-monthly change in the CPI immediately prior to those periods is distributed between the number of days comprising the publication period, such that the percentage change of the UDI is the same for each of those days.

The procedure for calculating UDIs was published in the Official Federal Gazette (OFG) on April 4, 1995. The text published in the OFG can be consulted in this website under section Procedure for calculating and publishing UDIs.

 

PPI

  • What is the PPI?


The Producer Price Index (PPI) is a series of indicators, also known as the National System of Producer Price Indexes (NSPPI), which measures price changes in a basket of goods and services representing national production.

Production is comprised of Finished and Intermediate Goods. Finished Goods are those that do not require any modification prior to consumption, or which are not sold within the country. On the other hand, Intermediate Goods are those which, while having undergone a given process, must be transformed prior to consumption.

 

  • What is the PPI used for?

The PPI measures price changes in a fixed basket of goods and services representing national production (finished and intermediate goods, for both domestic and export markets).

The PPI can be used as a leading indicator of the CPI. It is also useful to economic agents for decision-making purposes and serves as a base for updating public and private contracts. For further information, please consult the PPI Guide.

 

  • How is the PPI created?

The PPI uses production data reported by the National Institute of Statistics and Geography (INEGI, for its acronym in Spanish) in Mexico’s National Accounts System. Industrial surveys and statistical documents are also used to calculate the basket of goods and services to be included in the PPI.

The PPI has a basket of 600 universal items based on information obtained from 2,000 companies across Mexico and a monthly review of 15,000 products.

The PPI is calculated using the Laspeyres fixed-weight formula and a methodology that complies with international standards for preparing price indexes.

 

  • What is the PPI’s coverage?

The PPI covers all economic activity sectors reported in the Mexican Catalog of Economic Activities (CMAE, for its acronym in Spanish) except for those referring to Financial Services and Commerce. The gathering of prices for the PPI takes the whole of the country into account, in particular cities considered in the CPI’s regions; however, the index is only calculated at the national level.

 

  • When did the PPI begin to be published?

The PPI was published for the first time in 1981. At the time only primary activities, manufacturing, construction, and the electricity industry were included. The index’s structure has been updated twice, the first time in 1994 to include services, and the second in 2003. For the purpose of historical record keeping, the price indexes of items included in the PPI are available since the date on which they were included in the calculation, which coincides with one of the three dates previously mentioned (1981, 1994 or 2003).

As part of the changes in the PPI, in 1986 the index began to be published without the oil item because of this concept’s importance to national production and the high volatility of international oil references; consequently, economic agents did not have a measure of the real size of domestic producer price inflation.

 

  • Which prices are used to prepare the PPI?

Prices used to prepare the PPI do not include value added tax (VAT) or any other type of tax that is passed on to the buyer. They also exclude any transportation charges not included in the price which are invoiced separately. Prices are gathered confidentially and are classified according to the reason for the transaction and divided into three groups:

  • Free on Board (FOB) production plant, mainly for products in the mining and industrial sectors;
  • Wholesale markets for farm products, data provided by the National System of Market Information and Integration (SNIIM, for its acronym in Spanish) and INEGI prices; and
  • Consumer prices excluding taxes, if the latter are included. Applies to both merchandise and services but basically to the latter (for example, air transportation and medical expenses).

 

  • How often are the prices of goods and services used to prepare the PPI surveyed?

The frequency with which the prices of goods and services considered in the calculation of the PPI are surveyed is based on the frequency with which they change (also known as volatility). Products with prices changing the most (e.g. fruits and vegetables) are those that are more frequently surveyed.

Prices used to calculate the PPI correspond to monthly average prices prevailing in the market for the reported month based on the following:

  • Farm and Meat Product Prices: obtained from price measurements undertaken by SNIIM and Banco de México; they mostly correspond to daily prices and, to a lesser extent, to weekly prices;
  • Mining Sector Prices: these correspond to daily prices, weekly or monthly averages;    
  • Manufacturing Sector Prices: most prices used in the calculation of this sector are obtained monthly; and
  • Services Prices and the Sector 60 Construction Industry are mainly prices gathered on a half-monthly basis.

 

  • What is the difference between PPI finished goods and intermediate goods?

The National System of Producer Price Indexes (SNIPP, for its acronym in Spanish) is based on the national production of goods and services’ structure, which is divided into two sub groups: finished and intermediate goods:

Finished goods and services are those consumed by households and the government as well as those destined for investment or export. The following are examples of finished goods: baby apparel, cars, residential electricity, medical services, computers, and the subway service. The Finished Merchandise and Services index is considered the ultimate indicator of producer price inflation; and

Intermediate goods and services are used to produce finished goods or are consumed in order to render a service. This category includes those which while having been processed, require an additional transformation before they can be classified as finished goods. The following are examples of intermediate goods: flour, fabrics, cardboard boxes, steel plates, cement, autoparts, and commercial and industrial electricity. Adding intermediate goods is considered an indicator of possible inflationary pressures on finished goods.

 

  • What is the difference between the PPI of intermediate goods and of primary goods/raw materials?

The difference between the PPI of intermediate goods and of primary goods/raw materials is that in the former PPI, universal items commonly used to make other goods based on who produces them are classified (the weights correspond to their participation in the production value of the sector that produces them) and, in the case of the latter, they are grouped according to who consumes them (the weights correspond to their participation in the cost of production of other groups of goods). As an example, let us consider the universal product Corn.

The item Corn (corn price index) is an intermediary good (supply side) when considered, according to its importance, in the calculation of the price index of the sector that produces it, which in this case is the Agricultural (Corn Producer) Sector Intermediate Goods Prices Index, Forestry, and Fishing (Chart 17). This production group includes other grains, fruits, vegetables, cattle, forest and fishing products.

Corn is also considered a commodity (demand side), when, according to its importance, it is used in the calculation of price indexes of sectors which consume it and their results are published in chart CP169 of Consumed Commodities. Activities that use corn for their production processes include the following: 14 Corn Milling (for the production of corn flour and tortilla), 17 Oils (those based on corn) and Vegetable Fats, 18 Animal Feed (to produce balanced feed for cattle), 19 Other Food Products (for corn flake production).

For additional information on the definitions applying to the National Producer Prices Index (PPI), please consult the PPI Guide.

 

  • Why do increases in PPI prices differ from those observed in the market?

The PPI is based on a representative sample of total national production. It does not therefore always coincide with specific situations, mainly because individual sale conditions vary from one case to another; however, the sample allows for obtaining an approximate measure of what economic agents experience as a whole. Changes in the PPI published by Banco de México may differ from what users may observe, for the following reasons mainly:

  • The price to be compared or updated does not correspond to the selected price index. The Producer Prices Index (PPI) is a series of indexes. The aim of each index is to represent different production baskets and consumption markets and so the one that is closest to each user’s needs should be used. For example:
    • The price index of a PPI universal product that is published in the Total Production chart corresponds to the weighted addition of the prices of the same universal item for the Domestic and Export Markets. As the price behavior of a universal item can differ, the respective indexes are presented separately and can be consulted on Banco de México’s web page in section Producer Prices Index (PPI) for Cost/Price Updating;
  • The period under comparison does not correspond to that published by Banco de México. For example, for the PPI, what is published on January 9 of any year reflects the performance of prices prevailing in December (see Internet Results Publication Calendar); and 
  • Compare the price of one specific day with the monthly result of the PPI. The PPI is updated based on monthly average prices, which means that if the prices of a product change by 10 percent on day 16 of any given month, the average change in the PPI for that month will be 5 percent; the other 5 percent to reach the 10 percent change observed will be reflected the following month. It should be pointed out that prices included in the calculation of the PPI are subject to a validation process to verify their quality and accuracy, which is why a Quality System ISO-9001 is included in the preparation of the index to guarantee the precision and reliability of the results obtained.

 

  • Where can I find the price indexes used in the updating of public works costs/prices?

One of the most important uses of the PPI is for cost/price updating in general, but particularly costs/prices related to public works. The Law on Public Works and Related Services, the Public Affairs Ministry (formerly Ministry of the Comptrollership and Administrative Development) established that as of March 2000, price updating will be made based on the Public Works Input Materials chart. This chart is an abridged version of the Merchandise and Services Total Production chart (previously PPI with services chart) which contains all groups and products considered when preparing the PPI.

If you need to update any other concept not related to public works, please refer to section Producer Price Index (PPI) for Cost/Price Updating where you will find different indexes that might be useful for updating the costs/prices of diverse products or groups of interest.

 

  • Where is the PPI with services referred to in the Law on Public Works and Related Services located?

As of January 2004, the PPI with services was substituted by the Merchandise and Services PPI. In order to know the changes that took place on that date, please consult Chart 1994 Basic Basket Correspondence with respect to the December 2003 Basic Basket.

To facilitate access to the most frequently consulted concepts, please consult Chart Public Works Inputs, which is an abridged version of the Total Production chart containing all groupings and products considered in the preparation of the merchandise and services PPI.

 

  • What index do you recommend I use to update the cost/price of a good/service used in Public Works and which I cannot find in the PPI?

The department that is responsible for updating public works costs/prices is the Public Affairs Ministry through the Law on Public Works and Related Services.

 

  • What chart should I consult to follow up what was previously published in CP36 Net Production?

Due to the change in the PPI base, for updating reasons, as of January 2004 the chart CP170 PPI Total Production was replaced by the chart CP36 PPI Net Production.

 

  • What should I understand by price indexes of Total Production universal items published in the Producer Prices section?

Price indexes of Total Production universal items are used to adjust the total value of a good or activity for inflation, as the prices of merchandise and services produced in the country are considered regardless of whether they are sold locally or abroad (they exclude imports).

 

  • What does price indexes of universal products for the Domestic Market published in the Producer Prices section mean?

Price indexes of universal products for the Domestic Market are useful for adjusting the value of domestic production sold in the country, either as intermediate goods or for domestic final demand, for inflation. These indexes exclude exports and imports.

 

  • What do price indexes of universal concepts/items for the Export Market published in the Producer Prices section mean?

Price indexes of universal products for the Export Market are useful for adjusting the value of national production sold abroad for inflation. In this case, most prices are reported in dollars and their conversion to pesos is done using the exchange rate the informing company indicates to be the one used in its operations.

 

  • PPI frequency of publication

PPI publishes results on a monthly basis. Due to late reports or reviews by some informants, the results are susceptible to review after their publication date (this situation is unusual). The information is published on INEGI’s web page.

 

  • What are the differences between the PPI and the CPI?

Mexico has different price indexes. The main ones are the Consumer Price Index (CPI) and the Producer Price Index (NPPI). The main differences are indicated in the following chart:

PPI CPI
It estimates the trend in the prices of goods and services produced in the economy. It is an indicator of the behavior of the prices of goods and services that households acquire for consumption.
Besides household consumption it also includes intermediate goods and services, government consumption, investment and exports. It only includes goods and services households acquire for consumption.
Weights are estimated based on Mexico’s National Accounts System (SCNM, for its acronym in Spanish). Weights are based on INEGI surveys of households which, when aggregated, constitute the National Survey of Household Expenditure (ENIGH).
It does not consider imports. Imports are included as a fraction of the goods that households consume.
Prices are gathered directly from the companies that produce the goods or supply the services. They are gathered from the establishments or information sources from where families go to purchase the goods and services they consume.
The prices quoted are mainly Free on Board (FOB) production plant. Therefore they do not include consumption taxes, transport costs and sales margins. They are based on final consumer prices which include consumption taxes, transport costs, and sales margins.
National results are presented. It is calculated for 46 cities and at the national level.
Monthly frequency. It is published on day 9 of each month at the latest in a press bulletin and on Banco de Mexico’s website. Half-monthly frequency. The results are published on day 10 and 25 of each month in the Official Federal Gazette, in a press bulletin (which is released one day prior to its publication in the Official Gazette) and on Banco de México’s website.

 

  • What is the difference between the price indexes of construction materials that are published in chart CP170 Total Production and chart CP165 Construction Materials?

The National System of Producer Prices (SNIPP, for its acronym in Spanish) is a series of price indicators measuring diverse economic sectors. As for construction, different levels of commercialization can be consulted depending on the type of product.

In the case of construction material price indexes shown in chart CP170 Total Production, they refer to prices that do not include taxes and transportation costs. The prices are obtained from diverse companies in Mexico. For example, basic metal industry prices (steel and copper products mainly) and non-metallic mineral products (glass, cement, tiles, asbestos products among the more relevant) are quoted directly with the producer.

Construction price indexes published in the charts CP165 Construction Materials refer to prices surveyed among distributors of such products located in 46 cities. Prices of these materials are quoted under the free on construction site concept (the cost of transporting the material to the buyer is considered) and include imported materials. The sum of these prices is used, among other things, to measure the price behavior of Sector 60 Construction of the PPI Secondary Economic Sector. This is based on the production cost concept, which is used to infer the increase in construction prices in Mexico.