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Mexico Annual CPI Falls Within Target Range After Six Months

Mexican inflation slowed in the first half of December to within policy makers’ target range for the first time since May, buoying expectations that the benchmark interest rate will remain on hold.

Prices climbed 0.27 percent, the national statistics agency said today, slowing annual inflation to 3.76 percent as of Dec. 15 from 4.18 percent in November. That’s within the central bank’s 2 percent to 4 percent target range. Analysts had expected prices to rise 0.35 percent, according to the median of 13 estimates in a Bloomberg survey. Core inflation, which excludes energy and food, rose 0.26 percent.

The inflation rate had remained above the target range since June after a bird-flu outbreak pushed up egg and poultry costs. Policy makers said in the minutes from their Nov. 30 meeting that they see a clear downward inflation trend and warned that Mexico’s growth outlook has been hurt by U.S. fiscal uncertainty. The central bank board kept the key interest rate unchanged at a record-low 4.5 percent last month, saying inflation would drop within the target range by year-end.

“What’s helped inflation this year is mobile phone costs, which fell again in the first half of December,” Delia Paredes, an economist at Grupo Financiero Banorte SAB, said in a telephone interview from Mexico City. “The data supports our forecast that the central bank will remain on hold for a long period of time.”

Paredes said inflation may still climb above the target range for a few months in 2013, peaking at 4.2 percent in April before returning to 3.9 percent by year-end.

Improving CPI

Mexicans paid 3.02 percent less for mobile phone service and 0.28 percent less for fruits and vegetables in the first half of December from two weeks prior, according to the statistics institute.

Annual inflation will end the year at 4.00 percent and will end 2013 at 3.69 percent, according to a survey of economists published by the central bank Dec. 19.

The central bank minutes published Dec. 14 said that the inflation outlook has improved “at the margins” and reiterated that the central bank may consider raising rates if new inflation shocks arise. Most board members said they saw a risk to CPI in the possibility of higher-than-expected prices set by the government. The government decides prices including gasoline and other energy costs.

“We see inflation below 4 percent” for several months, Rafael Camarena, an economist at Banco Santander SA in Mexico City, said in a telephone interview before the report. “We don’t think the central bank will raise rates.”

Spending Cuts

Mexico’s economic growth eased to 3.3 percent in the third quarter from 4.4 percent in the previous three months as U.S. business investment slowed on concern Congress will fail to avoid $600 billion in automatic spending cuts and tax increases in January.

Latin America’s second-biggest economy will grow 3.8 percent this year, about four times the pace of Brazil and almost double the U.S., and 3.5 percent in 2013, according to the median estimate of economists surveyed by Bloomberg.

Foreign companies are stepping up to take advantage of that growth. Sherwin-Williams Co., the largest U.S. paint retailer, last month agreed to acquire closely held Consorcio Comex SA de CV, Mexico’s largest paint maker, for about $2.34 billion including debt as housing demand improves.

Anheuser-Busch InBev NV in June agreed to pay $20.1 billion for the half of Grupo Modelo SAB, Mexico’s largest brewer, that it didn’t already own to speed up its push into faster-growing developing countries.

Softer Language

There’s been a “shift in trend” in inflation since the rate climbed to a two-year high of 4.77 percent in September, central bank Deputy Governor Manuel Ramos Francia wrote in a report published on the bank’s website Dec. 10.

While softening its language in a statement accompanying the Nov. 30 rate decision, the central bank still referred to monetary policy tightening.

“If new shocks to inflation emerge, even if they are presumed to be temporary” the board may find it “appropriate” to tighten monetary policy, the bank said.

Yields on Mexican inflation-linked bonds due in 2014 rose one basis point to 1.02 percent at 8:52 a.m. in Mexico City. The peso fell 0.9 percent to 12.8741 per U.S. dollar. The currency has strengthened 8.2 percent this year, the best performance among 16 major currencies tracked by Bloomberg.

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