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Mexico Inflation Quickens as Peso Falls and Growth Picks Up

June 7 (Bloomberg) -- Mexico’s inflation rate rose for the first time in four months in May as the economy picked up and the peso weakened, cementing expectations that policy makers will refrain from cutting interest rates.

Inflation accelerated to 3.85 percent from 3.41 percent the month before, the biggest pick-up since January 2010, the national statistics institute said on its website today. In the month, prices dropped 0.32 percent due to seasonal electricity subsidies. The median forecast of 13 economists surveyed by Bloomberg was for prices to rise 3.8 percent in the year.

The peso depreciated 9.5 percent in May, the worst performance of 16 major currencies tracked by Bloomberg, pressuring the cost of imports. Inflation accelerated after the biggest drop in prices in 42 years in May 2011 fell out of the annual calculation, while the economy grew at the fastest pace in six quarters in the first three months of the year, fueling demand.

“There is evidence of moderate pass-through to domestic prices from a weaker peso and budding mild pressures on services,” Alberto Ramos, a senior Latin America economist at Goldman Sachs Group Inc., said in a report today. “There is no strong evidence of either demand-pull or labor market-driven cost-push pressures on inflation.”

Yields on inflation-linked bonds due in 2013, known as Udibonos, declined 7 basis points, or 0.70 percentage point, to 0.299 percent at 10:00 a.m. in Mexico City, according to data compiled by Bloomberg.

Core Inflation

Core inflation, which excludes food and energy, accelerated to 3.48 percent, the fastest pace since December 2010.

Economists expect the central bank to keep the overnight lending rate at a record low of 4.5 percent this year, according to a June 4 Banamex survey of analysts. The poll estimated inflation in the next 12 months at 3.92 percent, up from 3.87 percent in the previous bi-weekly survey.

The target range for inflation is 3 percent, plus or minus one percentage point.

“There’ll be a kind of hump in inflation in the coming months,” Sergio Luna, chief economist at Citigroup Inc.’s Banamex unit in Mexico City said before the report. “We’ll be alert to pass-through from the peso to local prices, although this has been much more limited than in the past.”

Mexicans paid 0.42 percent more for food, beverages and tobacco than the previous month and 2.14 percent more for fruits and vegetables, the statistics agency said. Electricity prices fell 19.31 percent over the same period.

Peso Reaction

The peso strengthened 0.72 percent against the dollar to 13.9245 from 14.0255 yesterday at 10:06 a.m. in Mexico City.

The currency has depreciated in the past month as a deepening European debt crisis causes investors to avoid all but the safest currencies.

The peso will appreciate once volatility subsides in global financial markets, Finance Minister Jose Antonio Meade said June 5. Inflation expectations are “well-anchored,” he said.

Mexico’s economy grew 4.6 percent in the first quarter, the fastest pace since 2010. Analysts raised their estimate for economic growth this year for a fifth consecutive month in a June 1 central bank survey. Gross domestic product will expand 3.72 percent, the poll showed, up from 3.62 percent in the previous survey.

The central bank announces its next interest rate decision on June 8.

To contact the reporter on this story: Nacha Cattan in Mexico City at

To contact the editor responsible for this story: Joshua Goodman at

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