Pass through...

For many years when the peso devalued, inflation rose. Theoretically, only the price of "tradable goods" should rise with a devaluation. In practice, in Mexico, all prices increased. One of the major accomplishments of the macro-economic stability forged over the course of the last 25 years is that the link between devaluation and inflation, the "pass through" effect, was broken.

In the 2009 crisis, the average fix exchange rate devalued 17.5%. Notwithstanding that, inflation fell from 6.5% in 2008 to 3.6% in 2009. It's a striking contrast to 1995. That year, the average annual fix exchange rate devalued 45.1%. Inflation soared, climbing from 7.1% in 1994 to 51.2% in 1995.

That the pass through is no longer automatic doesn't mean that it no longer happens. The average monthly fix exchange rate devalued 9.6% between March and June 1-22. The inflation figures for the first half of June show that the devaluation is finally hitting price levels. In the first two weeks of this month, merchandise prices (the component of inflation in which the impact of a weaker peso shows up first) rose 0.26%, more than the overall inflation rate. In 15 days, merchandise prices rose by nearly as much as they did, on average, in each of the prior three months. If the peso doesn't revalue, inflation could exceed 4% this year.