'Inflation Police' Stalk Mexico

PRICES on chicken tostadas, chile relleno, and everything else on the menu at "La Casa del Buen Comer" dropped 5 percent recently. The discount was courtesy of the "Inflation Police." This small diner on the south side of Mexico City was one of 17 restaurants closed on April 10 for violating an agreement to reduce prices under the Pact for Economic Growth and Stability, known by the Spanish acronym PECE. "We agree with the pact but it should apply equally to everyone," says the restaurant manager, who requested anonymity. He complains the pizzeria across the street hasn't lowered its prices. And he claims he never heard about the mandatory discounts until federal officials arrived to shut down the diner for three days.

"If they don't respect the law, we step in for the consumers," says Fernando Gonzalez, a less-than-sympathetic spokesman for the Consumer Protection Agency, which enforces price violations. In the last year, the agency has handed out 247,000 fines across Mexico, most of them for inflation violations.

Last week, the "Salon of the Stars" beauty salon was shut down for three days. And consumer protection "inspectors" plan to continue to throw the book at businesses that don't offer discounts of 5 to 20 percent, as required by the latest pact accord.

Mexico's three-year-old program to fight inflation has always been controversial. Begun in late 1987 and continued under President Carlos Salinas de Gortari, the PECE is a series of government-orchestrated agreements between labor, farm, and business organizations to curb inflation by using wage, price, and exchange-rate controls. Indeed, inflation has fallen from 159.2 percent in 1987 to 29.9 percent last year.

But the current crackdown is triggering complaints from the business community that Javier Coello Trejo, the head of the Consumer Protection Agency, is applying the same vigorous tactics that analysts say resulted in his transfer last October from his post as chief of Mexico's drug war for alleged human rights abuses. Mr. Coello Trejo could not be reached for comment.

The 10 percent discount on taxi fares (if you ask for it), the 5 percent drop in airline fares, the 11.7 percent cut in egg prices, and a general jiggering of prices downward has a secondary goal: to weaken the case for a minimum-wage hike, analysts say.

The nation's largest trade union, the Confederation of Mexican Workers (CTM), is pressing for an increase from the current 12,000 pesos (about $4.00) per day. Over the life of the pact, prices for goods and services have risen about twice as fast as the minimum wage.

Its request rebuffed once, the union is planning one of its biggest demonstrations ever in Mexico City on May 1 to pressure the government.

"The CTM won't win a minimum-wage hike. It's a fundamental anchor of the pact," predicts Roberto Salinas Leon, economist at the Center for Free Enterprise Research, a conservative think tank here.

PAST minimum-wage hikes have rippled through the Mexican economy, boosting wages at all levels. Higher wages are then passed along in higher prices for goods, fueling inflation. The Salinas government is trying to de-emphasize the key roll of minimum wages.

"What the CTM doesn't seem to understand is that it can no longer rely on a minimum-wage hike to satisfy its members. If the CTM wants to increase wages, it must negotiate on a factory-by-factory or industry-by-industry basis," says chief economist Jonathan Heath of Macro Asesoria Economica, a Mexico City-based economic consulting firm.

While agreeing with the government's hard line on wages, economists say the pact's usefulness as a tool to limit inflation is finished. "It's served its purpose. Inertial inflation has been broken," Mr. Heath says. "It is still useful as a political instrument."

The crackdown on businesses that don't offer discounts is "exhibitionism" which only temporarily suppresses inflation, says economist Roberto Salinas.

Indeed, most economists credit the dramatic drop in the public deficit (from 16 percent of gross domestic product in 1987 to under 2 percent this year) for bringing inflation down. Inflation in the 1980s was due to having to finance a big deficit, economists say. The deficit was reduced by privatizing many subsidized, government companies.

"Mexico's public deficit is now completely consistent with single- digit inflation," notes Heath. But the reduction in subsidies for some basic commodities and services (such as electricity) and privatization of state-enterprises tends to push prices up.

Inflation over the last twelve months is at 26 percent and declining. The Mexican government has a target of 14 percent. Heath predicts that inflation for 1991 will come in at about 19 percent. If the government changes the exchange-rate policy and cuts the value-added tax from 15 to 10 percent, that could "shave 2 to 3 percentage points off the 1991 inflation rate," says Heath. Both changes are rumored as there are important state gubernatorial and congressional elections in August.

One concern on the horizon is the bulge in the money in circulation. The M1 measure of money supply jumped 65.3 percent between February 1990 and February 1991. The economy grew 3.9 percent last year with a boom coming in the last six months. "The experience of Mexico - with the past three presidents - is that so-called austerity finished when we got to an election year," warns economist Salinas.