Mexico CPI Rises Less Than Expected as Farm Prices Decline

Mexican consumer prices rose less than economists expected in January as falling farm prices softened the impact of new taxes on everything from potato chips to chocolates. Inflation-linked bond yields soared.

Prices climbed 0.89 percent from the previous month, the national statistics agency said, compared with the 0.97 percent median forecast of 20 analysts surveyed by Bloomberg. Annual inflation quickened to 4.48 percent from 3.97 percent, above the 4 percent upper limit of the target range. Core prices, which exclude energy and farm costs, gained 0.85 percent, less than the 0.89 percent forecast in a separate Bloomberg poll.

Banco de Mexico has said that a pick-up in inflation from new taxes isn’t spreading to the broader economy and that price increases will probably slow to within policy makers’ target range in the second quarter. Today’s inflation figure supports the view that the central bank won’t raise the benchmark interest rate this year as high inflation will be temporary, said Delia Paredes, Grupo Financiero Banorte SAB’s executive director for economic analysis.

“We don’t see Banxico moving rates in the foreseeable future,” Paredes said in an e-mailed response to questions. High inflation “won’t have a second-order effect on prices.”

The peso erased previous losses and was little changed at 13.2748 at 8:28 a.m. in Mexico City. The currency fell to its lowest level in 18 months on a closing basis earlier this week after the U.S. Federal Reserve said it would reduce the amount of bonds it purchases each month, sapping demand for assets from developing countries. A weak peso can pressure inflation by pushing up import prices.

Fruits and Vegetables

Farm prices fell 0.67 percent in January from the previous month, with fruit and vegetable costs dropping 4.27 percent, the statistics institute said.

Even so, lime prices soared 45 percent as violence increased in the state of Michoacan, the nation’s second-biggest producer of the fruit, according to Barclays Plc and Bank of Nova Scotia. The government says lime prices have risen due to poor weather.

The yield on inflation-linked bonds due in 2016 rose 9 basis points to 0.99 percent. Twelve-month swaps rates fell three basis points to 4.00 percent, indicating traders see about a 76 percent probability Mexico will lift borrowing costs in 2014.

Key Rate

Economists see inflation ending the year above the 4 percent upper limit of the target range at 4.09 percent as economic growth recovers, according to a Feb. 6 central bank survey. Still, a majority of analysts expect Banxico to leave its key rate at a record-low 3.5 percent this year, according to the monthly poll. The economy will expand 3.4 percent after growing 1.2 percent in 2013, the survey shows.

The central bank left the overnight lending rate unchanged on Jan. 31 after cutting it three times last year, saying economic growth is picking up gradually and faster inflation will be transitory.

Finance Minister Luis Videgaray reaffirmed in a radio interview yesterday the government’s growth forecast of 3.9 percent for this year, even after recent economic indicators disappointed analysts.

Consumer confidence unexpectedly fell in January to 84.5, the lowest level since April 2010. The seasonally adjusted purchasing managers’ index for manufacturing also dropped to 49.7 in January from 50.3 the previous month, the Mexican Institute of Finance Executives reported this week. And the economic activity indicator slid 0.04 percent in November from a year earlier, according to the statistics institute.

“Inflation will remain subdued under a moderate recovery,” Marco Oviedo, chief Mexico economist at Barclays, said in an e-mailed response to questions before today’s report. The central bank would only raise rates this year “if the economy recovers strongly, inflation accelerates and the peso remains weak for a persistent period of time.”

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