Cheap Gasoline in Mexico Has Bond Traders Paring Inflation Bets

  • Gasoline would be tied to market rates under government plan
  • Inflation rate has fallen to 2.52 percent, lowest since 1968

Mexicans are poised to pay a lot less for gasoline. That has bond traders rethinking their assumptions about inflation.

Last month, President Enrique Pena Nieto proposed tying gas prices to prevailing international levels starting in January, bringing forward a transition previously slated for 2018. The move could be a huge savings for the nation’s consumers, who currently pay an average of 38 percent more for gasoline than those in the U.S.

The change is likely to mitigate the potential jump in import prices after the peso’s tumble this year and limit increases in the cost of living. Bond traders have taken note. They now see inflation averaging 3.47 percent a year over the next two years. That compares with an outlook of 3.72 percent in September.

“There’s an expectation gasoline prices are going to decline,” Marco Oviedo, chief Mexico economist at Barclays Plc, said from Mexico City. He projects inflation of 3.1 percent next year.

In an interview earlier this month, Finance Minister Luis Videgaray said speeding up the elimination of government-set gasoline prices “should be favorable to inflation expectations.”

“Historically, gasoline and diesel prices are public prices expected to increase,” he said. “The moment that’s substituted by a market expectation, inflation expectations become much more neutral.”

Mexico’s lower house approved the change in gasoline prices, which is included in the revenue portion of the proposed budget, on Monday. The senate is required to pass it by the end of this month.

Regular gasoline in Mexico currently sells for 13.57 pesos per liter, or about 51 pesos ($3.10) a gallon, according to Mexico’s gas-station association. That compares with an average retail price of $2.25 per gallon in the U.S., according to Heathrow, Florida-based AAA, the nation’s biggest motoring group.

While gasoline prices may decline, the currency’s 18 percent tumble in the past year is likely to raise retail prices as importers pass along higher costs, said Gabriel Lozano, JPMorgan Chase & Co.’s chief Mexico economist.

"The currency will be more determinant" for inflation, Lozano, who expects consumer prices to increase 3.8 percent next year, said from Mexico City.

Mexico’s peso dropped 0.5 percent to 16.6515 per dollar at 11:40 a.m. in New York.

The government’s moves this year to end monthly gasoline price increases and eliminate long-distance telephone fees have outweighed the impact of the weaker currency on living expenses. The annual inflation rate fell to 2.52 percent in September, the lowest level since 1968, even after the peso slumped to a record low.

“There’s a high probability that gasoline prices remain the same or even decrease a little bit,” said Benito Berber, a strategist at Nomura Holdings Inc. in New York. “I thought the drop in telecom prices was a one-off thing, but we could see a further reduction. Those two things are huge for the dynamic of prices.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE