Mexico Prices Fall More Than Forecast as Electricity Tumbles

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Mexico consumer prices fell more than expected in the first half of April, as the government phased in electricity discounts and a weak economic recovery limited inflationary pressures.

Prices tumbled 0.45 percent from the second half of the previous month, the national statistics institute said on its website today, more than the median forecast for a 0.22 percent decline of 17 analysts surveyed by Bloomberg. The annual inflation rate fell to 3.03 percent from 3.3 percent in the last two weeks of March.

Banco de Mexico Governor Agustin Carstens on Sunday said he doesn’t rule out keeping interest rates at a record low even after the Federal Reserve begins to tighten, given sluggish growth and inflation in Latin America’s second-largest economy. Economic activity was little changed in February compared with the previous month, according to a separate report released today by the government statistics agency.

“The very benign inflation picture and disappointingly sluggish real activity endow the central bank with extra degrees of freedom to wait before starting to normalize monetary conditions,” Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., said in a note to clients today. Tepid domestic demand and ample economic slack “should prevent the emergence of major inflationary pressures in the near term.”

The peso strengthened 0.6 percent to 15.3572 per U.S. dollar at 10:45 a.m. in Mexico City.

Electricity Bills

Core prices, which exclude energy and farm costs, increased 0.03 percent in the first half of April from the previous two-week period, less than the 0.10 percent median forecast by analysts.

Companies have limited ability to raise prices even after the peso’s 12 percent drop against the dollar in the last six months boosts costs for importers, according to Carlos Capistran, chief Mexico economist at Bank of America Corp.

“The economic recovery is still weak,” Capistran said in an e-mailed response to questions. “This has prevented firms from passing through the depreciation to merchandise prices.”

Electricity prices fell 14.1 percent this year in the first half of April compared with the previous two-week period, making them the biggest contributor to the drop in total inflation. Consumer prices have fallen during the first half of April in each of the last six years as summer electricity subsidies begin.

The yearly pace of price increases fell to the lowest since 2006 in late February and early March as Mexico ended monthly gasoline price increases and some food prices dropped.

Inflation Target

The central bank said this month that a majority of board members expect price increases to remain near the bank’s 3 percent target in coming months.

Policy makers kept the key interest rate unchanged at a record low of 3 percent on March 26, saying the balance of risks for economic growth has deteriorated since the board’s last decision in late January. Slack in the labor market and economy mean that inflation doesn’t face demand pressures, policy makers said in a statement accompanying their decision.

The central bank lowered its benchmark rate half a point in June in an effort to bolster growth that has missed economists’ forecasts in eight of the past 11 quarters. The next monetary policy meeting is scheduled for April 30.

Policy makers said they can’t rule out that inflation may rise if the peso remains at current levels for a prolonged period or weakens further.

Inflation will end the year at 3.2 percent, according to the median forecast of economists surveyed by Bloomberg. The economy will expand 2.8 percent this year, up from 2.1 percent last year, analysts forecast.

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