Mexico CPI Rises More Than Expected as Soda Tax Takes Effect

Mexican consumer prices rose more than expected in early January, pushing annual inflation to the highest since mid-May, after new taxes on everything from dog food to soft drinks took effect.

Prices climbed 0.68 percent in the two weeks to Jan. 15, the national statistics agency said, compared with the 0.60 percent median forecast of 20 analysts in a Bloomberg survey. Annual inflation quickened to 4.63 percent from 4.09 percent in the second half of December, above the 4 percent upper limit of the target range. Core prices, which exclude energy and farm costs, increased 0.69 percent, more than the 0.60 percent rise forecast in a separate Bloomberg poll.

Soft drink prices led the jump in inflation as new taxes on junk food and higher sales levies in regions bordering the U.S. took effect Jan. 1. The central bank has said the price increases will be temporary and that slack remains in the economy, leading most analysts in a Jan. 21 survey by Citigroup Inc.’s Banamex unit to predict policy makers won’t raise rates until 2015.

“The central bank will remain on hold for the foreseeable future,” Delia Paredes, executive director for economic analysis at Grupo Financiero Banorte SAB, said in an e-mailed response to questions. “The inflationary pressures will be temporary as long as the economy continues to be weak.”

The yield on inflation-linked bonds due in 2016 fell two basis points to 0.54 percent at 8:23 a.m. in Mexico City. The peso weakened 0.1 percent to 13.3246 per dollar.

On Hold

The recent pick-up in inflation isn’t due to demand-side pressures, with the output gap likely to remain negative, central bank Governor Agustin Carstens said Jan. 10. The bank’s five-member board left rates on hold Dec. 6 following two consecutive rate cuts, saying the economy will strengthen slowly this year.

Core inflation, which the central bank tracks more closely than the full index, remains under control, Carstens said. Core prices gained 2.78 percent last year, after hitting a record low 2.37 percent in August, below policy makers’ 3 percent target.

The central bank will keep the key rate at a record low 3.5 percent until March 2015, according to the median estimate in the bi-weekly Banamex survey. The analysts predicted the economy will grow 3.4 percent this year after expanding 1.3 percent in 2013, the slowest pace since the 2009 recession.

In October, Mexico’s congress approved an 8 percent tax on junk food and a 1 peso-per liter levy on sugary drinks and boosted sales duties in regions bordering the U.S. to 16 percent from 11 percent. Mexico City raised its subway fare in December by 67 percent to 5 pesos per ride.

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