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Mexico CPI Rises Less Than Expected as Livestock Costs Drop

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Sept. 9 (Bloomberg) -- Mexican consumer prices rose less than expected in August as livestock costs fell, slowing annual inflation to its slowest pace since January.

Prices rose 0.28 percent from July, the national statistics agency said today on its website, compared with the median forecast for an increase of 0.33 percent from 18 economists in a Bloomberg survey. Annual inflation was 3.46 percent, compared with 3.47 percent in July, remaining below the 4 percent upper limit of the central bank’s target range. Core prices, which exclude energy and farm costs, increased 0.09 percent, less than the 0.11 percent median projection.

Mexican policy makers surprised analysts by cutting their benchmark interest rate for the second time this year on Sept. 6, saying the economy experienced a significant and unexpected slowdown in the second quarter. Banco de Mexico reduced the overnight lending rate by 25 basis points to a record-low 3.75 percent after the annual inflation rate fell in each of the previous three months amid easing agricultural prices.

“The inflation outlook remains very comfortable,” Alberto Ramos, the chief Latin America economist at Goldman Sachs Group Inc., said today in an e-mailed research report. “There is now room to accommodate some pass-through from a weaker Mexican peso without jeopardizing the inflation dynamics.”

Risks Intensified

The central bank said in a statement accompanying its decision that economic risks have intensified and growth next year will probably be less than it forecast in the quarterly inflation report on Aug. 7. In that report, Banxico projected growth would be 3.2 percent to 4.2 percent next year.

The peso rose 0.3 percent to 13.1285 per U.S. dollar at 9:44 a.m. in Mexico City, paring its decline this year to 2.1 percent. While the peso may weaken further and contribute more to inflation if the U.S. Federal Reserve starts tapering its $85 billion of monthly asset purchases, it should have a limited effect on consumer prices, the central bank said on Sept. 6.

Livestock prices fell 0.5 percent in August from the month earlier, and chicken prices dropped 3.1 percent. The annual pace of core prices increases slowed to 2.37 percent, an all-time low.

Policy makers on Sept. 6 said that idle capacity in the economy may persist for a long time.

Growth slowed more than analysts forecast this year after the government reduced spending in the first half, Finance Minister Luis Videgaray said in a June 17 interview. The government on Aug. 20 cut its 2013 growth estimate to 1.8 percent from 3.1 percent after exports stagnated.

“The weakening of Mexico’s economic activity intensified significantly during the second quarter,” the central bank said in its statement last week . “This weakening occurred faster and deeper than anticipated.”

Banxico surprised analysts on March 9 by cutting its key borrowing rate by 0.5 percentage point, the first adjustment since July 2009.

To contact the reporters on this story: Eric Martin in New York at emartin21@bloomberg.net; Nacha Cattan in Mexico City at ncattan@bloomberg.net

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