Mexico Inflation Quickens More Than Forecast in Early August

Mexican consumer prices rose more than expected in the first half of August as the cost of gasoline and farm produce climbed, pushing up the annual inflation rate for the first time since May.

Prices increased 0.26 percent in the first two weeks of the month, the national statistics agency said today on its website, compared with the 0.16 percent median forecast of 16 economists surveyed by Bloomberg. Annual inflation climbed to 3.54 percent compared with 3.47 percent in July. Core prices, which exclude energy and farm costs, gained 0.1 percent, compared with the 0.11 percent estimate.

The central bank forecasts inflation will end the year at about 3.5 percent and remain close to the 3 percent target in 2014 after a surge in farm prices earlier this year subsided. While inflation has slowed in the past three months and the government cut its 2013 growth forecast to 1.8 percent from 3.1 percent, most economists predict the central bank will refrain from reducing interest rates again this year as the peso weakens, according to an Aug. 20 survey by Citigroup Inc.’s Banamex unit.

“Agriculture prices are causing lots of volatility” in inflation, Rafael Camarena, an economist at Grupo Financiero Santander Mexico SAB, said in a telephone interview from Mexico City. “Our forecast remains that the benchmark interest rate will stay at 4 percent.”

The central bank reduced its key rate from 4.5 percent in March.

The peso rose 0.5 percent to 13.1879 per dollar at 8:57 a.m. in Mexico City. The currency has weakened 9.5 percent from an almost two-year high in May on speculation the U.S. Federal Reserve will dial back record stimulus.

Farm Costs

Farm prices climbed 1.35 percent in the first two weeks of August, while gasoline costs increased 0.72 percent

Traders are assigning about a 16 percent chance of a rate reduction over the next six months, based on swap-rates used to speculate on borrowing costs, down from 24 percent yesterday.

Mexico’s economy grew 1.5 percent in the second quarter from a year earlier, less than the 2.3 percent forecast by analysts in a Bloomberg survey, as industrial production and construction declined, the national statistics institute said Aug. 20. Gross domestic product probably will expand less in 2013 than in Brazil for the first time in three years, according to the median forecast in a Bloomberg survey of economists.

“With an economy that shrank in the second quarter and risks falling into a recession, the central bank should have more of a bias to cut,” Rafael de la Fuente, an economist at UBS AG in Stamford, Connecticut, said in an e-mail. “Still, with the volatility in the peso and the Fed due to start tapering, my sense is that they will stay on hold.”

Inflation will end the year at 3.5 percent, according to the median estimate in Banamex’s bi-weekly survey, down from a 3.6 percent estimate in the previous survey.

Inflation slowed to within the central bank’s 2 percent to 4 percent target range last month for the first time since February, hitting its lowest rate since January.

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