Mexico CPI Rises More Than Expected as Capital Metro Fare Jumps

Mexican consumer prices rose more than expected in December, pushing annual inflation to its highest since June, after the nation’s capital raised subway fares and congress approved new taxes on junk food.

Prices climbed 0.57 percent from the previous month, the national statistics agency said, compared with the 0.52 percent median forecast of 23 analysts in a Bloomberg survey. Annual inflation (MXCPYOY) quickened to 3.97 percent, the most since June and up from 3.62 percent in November, while remaining below the 4 percent upper limit of the central bank’s target range. Core prices (MXBWCORE), which exclude energy and farm costs, increased 0.33 percent, less than the 0.34 percent rise projected in a separate Bloomberg poll.

Analysts polled by Citigroup Inc.’s Banamex unit expect inflation to accelerate further as higher sales taxes in regions bordering the U.S. and on junk food take effect this year. The pick-up in inflation and forecasts of a gradual strengthening in the economy will lead Banco de Mexico to keep interest rates on hold in 2014, analysts forecast.

Policy makers won’t raise the 3.5 percent record-low rate until March 2015, according to the Banamex survey published Jan. 7. Inflation will end this year at 3.9 percent and the economy will expand 3.4 percent after growing 1.3 percent in 2013, analysts forecast in the bi-weekly poll. They estimated consumer prices will rise 0.86 percent in January from the previous month.

The yield on inflation-linked government bonds due in 2016 fell three basis points to 0.60 percent at 8:04 a.m. in Mexico City. The peso strengthened 0.1 percent to 13.1215 per dollar.

Considerable Slack

“Despite the incipient rebound that has begun to register in economic activity, there’s still a considerable degree of slack in the labor market and the economy,” the central bank said in a statement accompany its Dec. 6 rate decision. The bank kept rates on hold at that meeting after cutting borrowing costs in each of its two prior sessions.

In October, Mexico’s congress approved an 8 percent tax on junk food, boosted sales duties in regions bordering the U.S. to 16 percent from 11 percent, and passed new levies on mining companies and maquiladoras. Mexico City raised its subway fare in December by 67 percent to 5 pesos per ride.

Grupo Financiero Banorte SAB said in a Jan. 6 report that annual CPI may reach 4.89 percent in the first quarter, the highest rate since 2010, with some companies raising prices even before the tax increases took effect on Jan. 1.

“We’re going to face a lot of volatility in inflation this year,” Gabriel Casillas, Banorte chief economist and head of research, said in an interview the same day. Sluggish growth in the first months of 2014 due to new taxes followed by slower inflation by mid-year as the effects from taxes subside will allow the central bank to keep interest rates on hold, Casillas said.

The central bank’s next rate decision is Jan. 31.

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

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net

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