Mexico Annual Inflation Dips to Nine-Year Low on Power Costs

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Mexico’s annual inflation rate fell to the lowest in nine years as electricity discounts and lower food costs caused consumer prices to fall more than expected in the first half of May.

Prices tumbled 0.53 percent from the second half of the previous month, the national statistics institute said on its website today, more than the 0.45 percent decline that was the median forecast of 21 analysts surveyed by Bloomberg. The annual inflation rate fell to 2.93 percent, the lowest since late 2005.

Inflation will probably end the year slightly below the central bank’s target of 3 percent as demand-side pressures remain limited amid a “moderate” economic recovery, policy makers said in a report Tuesday. Banco de Mexico Governor Agustin Carstens said the sluggish economy is unlikely to prevent policy makers from raising interest rates when the U.S. lifts borrowing costs.

“Inflation has been surprising to the downside in a constant manner,” Marco Oviedo, chief Mexico economist at Barclays Plc, said in a note to clients. “If the expectation of a rate hike in the U.S. were not present, we could start talking about a rate cut again” in Mexico.

Oviedo cut his forecast for the year-end inflation rate to 2.6 percent from 2.8 percent. The peso weakened 0.5 percent to 15.2955 per U.S. dollar at 9:25 a.m. in Mexico City.

Core prices, which exclude energy and farm costs, rose 0.03 percent in the first half of May from the previous two-week period, less than the 0.12 percent increase that was analysts’ median forecast.

Electricity Subsidies

Falling electricity prices were the largest contributor to the decline in costs during the first half of May as the government phased in summer subsidies. Prices for fresh foods such as eggs, tomatoes and onions also declined.

Banco de Mexico kept borrowing rates unchanged at a record low April 30, saying the economy continues to show weakness. It cut its 2015 growth forecast this week to between 2 percent and 3 percent from a previous estimated range of 2.5 percent to 3.5 percent.

The central bank unexpectedly lowered its benchmark rate half a point in June to a record-low 3 percent, in an effort to bolster growth that has missed economists’ forecasts in eight of the past 12 quarters. The next monetary policy meeting is scheduled for June 4.

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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