Mexico CPI Rises More Than Expected as Subway Fare Jumps

Mexican consumer prices rose more than expected in December, pushing annual inflation to its highest since June, after the nation’s capital raised subway fares and the cost of farm products rose.

Prices climbed 0.57 percent from the previous month, the national statistics agency said, compared with the 0.52 percent median forecast of 23 analysts in a Bloomberg survey. Annual inflation quickened to 3.97 percent, the most since June and up from 3.62 percent in November, while remaining below the 4 percent upper limit of the central bank’s target range. Core prices, which exclude energy and farm costs, increased 0.33 percent, less than the 0.34 percent rise projected in a separate Bloomberg poll.

Analysts polled by Citigroup Inc.’s Banamex unit expect inflation to accelerate further as higher sales taxes in regions bordering the U.S. and new levies on junk food take effect this year. The pick-up in inflation and forecasts of a strengthening economy will lead Banco de Mexico to keep interest rates on hold in 2014, analysts forecast.

“The spike in inflation and the gradual acceleration in the economy will probably make the central bank sound a bit hawkish,” Alonso Cervera, chief Latin America economist for Credit Suisse Group AG, said in an e-mailed response to questions. “But that doesn’t mean it will pull the trigger with rate hikes. There’s plenty of slack in the economy.”

Policy makers won’t raise the 3.5 percent record-low rate until March 2015, according to the Banamex survey published Jan. 7. Inflation will end this year at 3.9 percent and the economy will expand 3.4 percent after growing 1.3 percent in 2013, analysts forecast in the bi-weekly poll. They estimated consumer prices will rise 0.86 percent in January from the previous month.

Subway Prices

The yield on inflation-linked government bonds due in 2016 fell three basis points to 0.60 percent at 8:32 a.m. in Mexico City. The peso was little changed at 13.1303 per dollar.

Tomato prices rose 27 percent from the previous month and subway costs soared 30 percent, according to the statistics institute. Annual inflation for the second half of December reached 4.09 percent, above the central bank target range.

“Despite the incipient rebound that has begun to register in economic activity, there’s still a considerable degree of slack in the labor market and the economy,” the central bank said in a statement accompany its Dec. 6 rate decision. The bank kept rates on hold at that meeting after cutting borrowing costs in each of its two prior sessions.

New Levies

In October, Mexico’s congress approved an 8 percent tax on junk food, boosted sales duties in regions bordering the U.S. to 16 percent from 11 percent, and passed new levies on mining companies and maquiladoras. Mexico City raised its subway fare in December by 67 percent to 5 pesos per ride.

Grupo Financiero Banorte SAB said in a Jan. 6 report that annual CPI may reach 4.89 percent in the first quarter, the highest rate since 2010, with some companies raising prices even before the tax increases took effect on Jan. 1.

“We’re going to face a lot of volatility in inflation this year,” Gabriel Casillas, Banorte chief economist and head of research, said in an interview the same day. Sluggish growth in the first months of 2014 due to new taxes, followed by slower inflation by mid-year as the effects from taxes subside, will allow the central bank to keep interest rates on hold, Casillas said.

The central bank’s next rate decision is Jan. 31.

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