…You only control your actions and they only influence the probable evolution of your life on stochastic future paths”.
Arthur De Vany, American economist.
Mexico has experienced a process of price growth with levels of inflation higher than those observed in the last 20 years.
In this regard, there are two relevant phenomena. The first, the multiplicity of causes and factors that specialists argue as an explanation for this phenomenon. The second, the notorious inability that occurred in Mexico and worldwide on the part of experts to forecast the level and duration of this inflationary episode.
The first explanations that were given indicated that the pandemic had interrupted logistics processes and supply chains, which affected the production capacity of goods and services, directly or indirectly causing shortages, which generated pressure on prices.
Other explanations added the effect of the injection of resources from the United States government into the economy, such as direct support for families to face the crisis derived from the pandemic. Those additional resources impacted the demand and that increased the prices (for example in rents).
Many of the explanations made sense in the short term; at the beginning of the inflationary phenomenon, but they were not necessarily consistent with an inflation phenomenon that was prolonged over time. For this reason, an attempt was made to incorporate the view that the inflation expectations of economic agents, as a result of the previous phenomena, were no longer “anchored”, which generated additional pressure on price formation decisions.
The explanation of the inflationary phenomenon is more complex, especially in light of other data that show trends that should explain a reduction in demand and, consequently, less pressure on prices.
There are those who suppose that, in the face of a recovery of jobs or at least of general income in the economy, of those families that were affected at the beginning of the pandemic, the demand would have returned to the same place where they were; but this omits something more complex that requires a practical understanding of the economic impacts that really affect families.
If a family loses the income and employment of some of its members, even if it recovers a year later (employment and income level), it had an intermediate period of pressure that surely generated indebtedness and consequently financial imbalances beyond the short term. The household affected during the initial period of the pandemic had to pay expenses and this generated imbalances (in addition to those related to deaths and illness).
There is evidence that prolonged bouts of uncertainty change the way people make decisions.
If a person has lived in relative economic stability (even if not in a solvent position), his decisions operate based on a forecast that conditions will remain more or less the same in the future. For this reason, a brief episode of uncertainty, beyond the short-term impact, does not generate a dramatic change in their expectations. But when uncertainty is prolonged, it changes the perception of the future in significant and lasting ways, leading to decisions being adjusted radically and for a long time.
Finally, something that we must not forget is that economic phenomena do not always have an absolute deterministic behavior. They are, in the end, phenomena that involve human behavior. But, in addition, when there are multiple factors interacting in an accelerated and repeated manner, they can cause much more random and unforeseen results than we are used to facing.
The author is a political scientist, marketer, financier, specialist in behavioral economics and professor at the Faculty of Economics at UNAM. CEO of Fibra Educa and President of the Council for the Promotion of Educational Savings of Mexicana de Becas.
Follow him on Twitter @martinezsolares
CEO of Fibra Educa and President of the Council for the Promotion of Educational Savings
The author is a political scientist, marketer, financier, specialist in behavioral economics and professor at the Faculty of Economics at UNAM. CEO of Fibra Educa and President of the Council for the Promotion of Educational Savings.
Follow him on Twitter: @martinezsolares