Mexico Consumer Prices Rise Most Since March Amid Rate Cut

Mexican consumer prices rose in October by the most in seven months as electricity costs climbed, deepening expectations that central bankers will refrain from cutting interest rates again after two reductions.

Prices increased 0.48 percent from a month earlier, compared with the 0.46 percent median forecast of 20 economists in a Bloomberg survey. Annual inflation slowed to 3.36 percent, the least since January, from 3.39 percent in September.

The central bank yesterday raised its forecast for inflation next year to 3.5 percent, a week after Governor Agustin Carstens said policy makers shouldn’t reduce interest rates from the current record low because tax increases will add to pressure on prices in the short term. The central bank cut the benchmark interest rate a quarter percentage point to 3.5 percent on Oct. 25 and signaled that the move will be the last reduction in borrowing costs.

“The inflation results were largely in line with market expectations, and the central bank has been clear that the door is shut for further rate cuts,” Alonso Cervera, chief Mexico economist of Credit Suisse Group AG, said in an e-mail.

Inflation is likely to pick up next year after Congress last week approved an 8 percent levy on junk food, a 1 peso-per-liter duty on sugary drinks, and raised the sales tax at the border to 16 percent from 11 percent.

Fiscal Impact

“Taking into consideration the impact of the fiscal reform, a rate below 3.5 percent at this time, is not necessary, adequate for the convergence” of inflation to the central bank’s 3 percent target, Carstens said in an Oct. 30 interview.

While the central bank yesterday cut its growth forecast for this year to between 0.9 percent and 1.4 percent from 2 percent to 3 percent, it raised the inflation estimate for next year to 3.5 percent from near 3 percent, citing the tax increases.

The peso fell 0.5 percent to 13.2343 per U.S. dollar at 1 p.m. in Mexico City. Yields on fixed-rate government peso bonds due in December 2014 fell one basis point, or 0.01 percentage point, to 3.64 percent.

Retail sales and industrial production unexpectedly fell in August from the year earlier, adding to signs that economic weakness from the first half of the year continued in the third quarter.

“The risks to the downside for growth in the Mexican economy, while they are less than in the most recent months, remain elevated,” the central bank said in yesterday’s quarterly inflation report.

Electricity costs climbed 19 percent in October from a month earlier, contributing the most to the increase in consumer prices. The jump was due in part to the seasonal removal of a summer electricity subsidy, Gabriel Lozano, chief Mexico economist for JPMorgan Chase & Co., wrote in an e-mailed research note today.

Fruits and vegetable prices rose 0.3 percent, while costs for livestock fell 1.3 percent.

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