Fynsa
We have received the April CPI figures, which rose 1.3% from the previous month—slightly below our estimate (1.4% m/m) and the market’s (1.6% m/m). It comes as no surprise that 1.1 percentage points of this sharp increase can be attributed to rising fuel prices, caused by changes in MEPCO’s pricing parameters. As a result, year-over-year inflation rose from a manageable 2.8% to a concerning 4.0%, raising concerns for the future, especially if cost pressures end up being passed on to final consumer prices.
This is why ENAP’s statement regarding this week’s fuel prices took on particular significance, given that, according to established methodology, an adjustment was required based on the behavior of a number of variables, including the price of crude oil. Although a few days ago prices seemed to be easing following the reopening of the Strait of Hormuz, the ensuing tensions between the U.S. and Iran and the subsequent port blockades intensified the rise in oil prices, pushing them to their highest levels of the year. Thus, what at one point appeared to be heading toward a drop in local prices quickly turned into expectations of a new increase.
However, in light of this risk, the government once again proceeded to change the parameters of the MEPCO; specifically, the parameter that determines how many weeks are taken into account when calculating the backward-looking moving average. Thus, under the new parameter, the average would include the week when prices were lowest, which would curb a potential rise in gasoline prices and even cause a drop in diesel prices. Ultimately, this is what ended up happening, meaning that much of May would be governed by a lower average price than April, negatively impacting this month’s CPI.
Let's see, this isn't the first time this has happened, nor will it be the last. Other governments have resorted to this mechanism to moderate unpopular increases among the general public, in addition to the potential inflationary effects they cause. However, this comes nearly a month after the policy parameters were adjusted in precisely the opposite direction, which essentially allowed for a sharp increase in consumer prices, explaining the high CPI reading we just saw. This causes the mechanism to lose effectiveness, turning it into a price controller rather than a stabilizer, and makes it harder to predict future prices, which could potentially affect relevant inflation expectations.
The existence of a mechanism that smooths out price fluctuations through a fund is the result of more than a decade of trial and error with other systems that were less efficient and/or more costly for the government. Although historically the MEPCO was not the final system—since it was merely a transition to one that would operate not with funds but through a series of derivative transactions—we learned to live with it given its effectiveness and the rationale behind it. If we do not allow it to operate, it is as if it did not exist at all, and decisions regarding fuel prices would be made entirely at the government’s discretion. In a country where the entire economic institutional framework has shifted toward rules, we believe that preventing these systems from operating is a step backward that ultimately ends up causing more harm than good.
