Mexico Consumer Prices Unexpectedly Fall on Fresh Food Drop

Mexico’s consumer prices unexpectedly fell in early June on agricultural prices, damping speculation of an interest rate increase this year, even as inflation remains above target.

Prices slid 0.05 percent in the first two weeks of the month, the national statistics agency said today on its website, compared with the median estimate of 13 economists surveyed by Bloomberg for an increase of 0.08 percent. Annual inflation slowed to 4.24 percent from 4.63 percent in May, above the central bank’s 2 percent to 4 percent target range after fruit and vegetables dropped 5.06 percent. Core prices, which exclude energy and farm costs, rose 0.08 percent in early June, compared with an increase of 0.09 percent forecast in a Bloomberg survey.

Policy makers said downside risks to Latin America’s second-largest economy have “intensified” and inflation will slow toward target, according to the minutes of the central bank’s June 7 meeting, when they left the key rate at 4 percent after cutting it in March for the first time since 2009. The peso’s plunge this month on speculation the U.S. Federal Reserve will scale back its asset buying program has closed the door to a second rate cut in Mexico this year, and raised the possibility of an increase, according to economists.

“We were surprised by the number, but it was caused by a concentrated drop from agricultural products,” Rafael Camarena, an economist at Grupo Financiero Santander Mexico SAB in Mexico City, said by phone. Core inflation is stable and the central bank will maintain the benchmark rate unchanged, he said.

Inflation Forecast

The peso fell 0.6 percent to 13.3833 per dollar at 9:45 a.m. in Mexico City and has fallen 6.3 percent in the past month, the second-most among major currencies tracked by Bloomberg. The peso posted its biggest weekly drop since the global financial crisis in 2008 last week after the Fed said it may pare back monetary stimulus, damping demand for emerging market assets.

The yield on inflation-linked peso bonds due in 2014 rose 4 basis points to 0.70 percent today.

Inflation will slow slightly in June and more quickly starting in July after picking up “significantly” in recent months, policy makers said in the minutes to the June 7 decision.

A weaker peso pushes up import costs, and a rate cut risks pulling the currency down even further against the dollar.

Analyst Survey

Bond traders cut their expectations for cost-of-living increases from a five-month high earlier this month as a drop in food prices bolstered confidence central bank Governor Agustin Carstens will slow inflation to the 3 percent mid-point of the target range. The so-called break-even rate, based on the gap between yields of inflation-linked bonds due in 2014 and similar-maturity fixed-rate debt, fell 0.22 percentage point from June 6 to 3.45 percent today.

Still, economists now say Banxico’s next rate move will be a quarter-point increase in June 2014, according to the median estimate in a June 20 survey by Citigroup Inc.’s Banamex unit. In the previous biweekly poll, they estimated a half-point cut in September of this year.

The survey also showed economists slashed their 2013 growth expectations to 2.7 percent from 3 percent, less than the government’s 3.1 percent forecast. The government cut its own forecast last month from 3.5 percent after expansion slowed more than expected to 0.8 percent in the first quarter.

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