Mexico Inflation Breached Target in January as Drought Costs Rose: Economy

Mexico’s inflation rate surpassed the upper limit of the central bank’s target range for the first time since 2010, leaving policy makers little room to lower borrowing costs this year to help stimulate the economy.

Annual inflation in January quickened at the fastest pace since December 2010 to 4.05 percent, exceeding all 14 estimates of economists surveyed by Bloomberg. From a month earlier, prices rose 0.71 percent, the national statistics institute said on its website today. The monthly figure exceeded all 18 estimates of economists surveyed by Bloomberg.

Mexico’s inflation rate has risen four months in a row as the worst drought on record pushes up costs for staples such as tortillas, tomatoes and beef. With the U.S. economy strengthening, and price increases expected to breach the 4 percent upper limit of the central bank’s target range for several months, analysts don’t hold much hope for a rate cut.

“This makes it difficult for the central bank to have a more relaxed monetary policy in the short term,” said Rafael Camarena, a Mexico City-based economist at Banco Santander SA (SAN), whose current call is for rates to decrease in March. “In the coming weeks, we have to review our forecast to see if we will continue with a cut in March or not.”

U.S. stocks were little changed, a day after the Standard & Poor’s 500 Index rallied to a seven-month high, as investors weighed an agreement by Greek political leaders on measures needed to secure rescue funds.

The S&P 500 fell 0.1 percent to 1,348.93 as of 10:58 a.m. New York time. The Dow Jones Industrial Average declined 7.19 points, or 0.1 percent, to 12876.76 today.

Growth, Inflation

Elsewhere today, U.K. manufacturing jumped in December by five times as much as economists forecast and the total trade deficit shrank to the smallest since 2003. Factory output increased 1 percent from the previous month, while the trade gap in goods and services narrowed by more than half to 1.11 billion pounds ($1.7 billion).

China’s inflation unexpectedly accelerated in January on increased spending from a weeklong holiday, limiting room for monetary easing as Europe’s debt crisis damps exports and the property market cools. Prices rose 4.5 percent from a year earlier, the National Bureau of Statistics said on its website.

Speaking last night in the nation’s capital, Mexico’s Finance Minister Jose Antonio Meade played down the impact of the drought, saying inflation is under control.

“There’s nothing on the horizon that makes us think that inflationary targets are at risk,” Meade said at an event in Mexico City. “The drought has not yet had a strong impact in production regions. Its impact has been contained.”

Food, Tradable Goods

Food, beverages and tobacco account for 23 percent of the inflation basket measured by the statistics institute, according to data from Citigroup Inc.’s Banamex (BANAMEX) unit. Elsewhere in Latin America, the weighting of food in consumer price indexes ranges from 18.9 percent in Chile to 39 percent in Peru.

The peso traded at 12.7291 per U.S. dollar at 9:58 a.m. Mexico City time, down 0.1 percent from yesterday.

The yield on government fixed-rate peso debt due in December 2013 rose 1 basis point, or 0.01 percentage point, to 4.745 per cent at 9:59 a.m. in Mexico City, according to data compiled by Bloomberg. The price of the securities fell 0.05 centavo to 105.76 centavos per peso.

Mexicans paid 3.23 percent more for agricultural and livestock prices from a month earlier, which economists see as a sign that the drought in the northern region is driving up prices. Tradable goods rose 0.85 percent, a category economists associate with last year’s peso slump passing through to costs.

Inflation ‘Temporary’

Core prices, which exclude food and energy, gained 0.45 percent in January, more than the 0.40 percent median estimate of 16 economists surveyed by Bloomberg.

It is too soon to move up calls for the central bank to raise interest rates based on January’s inflation figure, said Delia Paredes, chief economist at Grupo Financiero Banorte, in Mexico City.

“It’s temporary and due to the drought,” Paredes said. “Although we are seeing relatively good economic activity for the first half of the year, the second half could decelerate and I think that will help inflation remain at 4 percent.”

The central bank, led by Governor Agustin Carstens, on Jan. 20 kept the benchmark rate at 4.5 percent for a 24th consecutive meeting, saying “the current monetary policy posture is conducive to reaching the permanent inflation target,” according to the meeting’s minutes.

Banco de Mexico targets 3 percent inflation, plus or minus one percentage point.

Divided Opinion

Board members disagreed on the risks to inflation and economic growth, diverging on whether the outlook on both fronts had improved or deteriorated, the minutes, published Feb. 3, showed.

Economists raised their estimate for both inflation and growth this year, according to the median estimate of 22 analysts in a bi-weekly survey conducted by Citigroup Inc.’s Banamex unit.

The Feb. 7 poll estimated inflation would end 2012 at 3.78 percent, up from 3.74 percent in the previous survey, and forecast economic growth of 3.2 percent this year, up from 3.1 percent previously.

Pass-Through

The survey also showed analysts expect no change in the central bank’s overnight rate until March 2013, raising it 25 basis points, or 0.25 percentage point.

Mexico’s benchmark IPC stock index has risen 3.8 percent in the last month in local currency terms. Yields on government peso-denominated, fixed-rate bonds maturing in 2024 have fallen eight basis points, or 0.08 percentage point, to 6.596 percent over the same period.

While the peso has been recovering this year, an 11 percent slump in the currency in 2011 will still have a “mild” impact on consumer prices, said Gabriel Casillas, chief Mexico economist at JPMorgan Chase & Co.

Other possible inflation drivers are “higher tortilla prices reflecting higher global corn prices, as well as a weak domestic corn harvest because of the drought,” Casillas said by phone Feb. 7.

Expectations

JPMorgan raised its year-end inflation forecast to 4 percent from 3.5 percent on Feb. 3 and Banorte’s Paredes predicted inflation will peak at 4.4 percent in June before it subsides to 3.8 percent by the end of 2012.

Consumer prices have absorbed the shocks to the country’s exchange rate “very well,” central bank Deputy Governor Manuel Ramos Francia said Jan. 12. Central bank studies have shown the exchange rate’s impact on consumer prices has been limited in the past, according to the bank’s minutes.

The peso has bounced back in the year to date to strengthen 9.5 percent, the best performance against the dollar among the 16-most traded currencies tracked by Bloomberg.

Consumer prices for the first half of January exceeded economists’ expectations, rising 0.32 percent, which was higher than 12 of the 16 estimates of economists surveyed by Bloomberg. The annual inflation rate rose to 3.82 in December, the highest in a year.

Growth in Latin America’s second-biggest economy will slow to around 3.5 percent this year from 4 percent in 2011, Finance Minister Meade said Jan. 5.

The central bank next meets to decide on rates March 16.

To contact the reporter on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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