Mexican Prices Fall Less Than Forecast as Farm Costs Rise

Mexican consumer prices fell less than expected in May as costs for some farm products increased, the statistics agency reported, three days after the central bank unexpectedly cut interest rates.

Prices fell 0.32 percent in the month, less than the 0.36 percent median forecast of 18 economists surveyed by Bloomberg. The drop was still the biggest in a year. Annual inflation was 3.51 percent, compared with 3.50 percent in April, and remained below the 4 percent upper limit of the bank’s target range.

Annual inflation has slowed this year as growth stagnated, leading the central bank to cut its benchmark rate half a point to a record low 3 percent last week. Banco de Mexico said in its May 21 quarterly inflation report that the pace of price increases may climb back above 4 percent for some months this year before nearing the 3 percent target in early 2015.

Inflation “continues to be in line with Banxico’s outlook,” Marco Oviedo, the chief Mexico economist at Barclays Plc, said in an e-mailed response to questions. “I think Banxico shot its last bullets to boost the economy. Inflation will not get lower.”

The peso weakened 0.4 percent to 12.9834 per U.S. dollar at 10:26 a.m. in Mexico City. The yield on inflation-linked bonds due in June 2016 fell 15 basis points, or 0.15 percentage point, to 0.17 percent.

Core Prices

Core prices, which exclude energy and farm costs, increased 0.09 percent in May, more than the 0.07 percent increase forecast by analysts.

Electricity costs dropped 23 percent, contributing the most to the decline in prices, amid the implementation of summer subsidies, while chicken prices jumped 8.6 percent and beef costs gained 1.9 percent.

Inflation has slowed from an eight-month high of 4.48 percent in January as the effect of new taxes wanes. On Jan. 1, Mexico increased the sales tax along the U.S. border and in some coastal areas to 16 percent from 11 percent and implemented a new 1-peso-per liter duty on soft drinks.

The tax increase damped growth in the first quarter, with the consumer confidence falling to the lowest level in almost four years in January.

“Still-subdued domestic demand conditions and the large amount of slack in the economy should prevent the emergence of either demand-pull or cost-push pressures on inflation,” Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., said in an e-mailed research report.

Slowing Down

Poor economic data suggests Mexico may grow less than the central bank had forecast in its quarterly inflation report, policy makers said in the statement accompanying their rate decision last week. The odds of inflation nearing the 3 percent target in early 2015 have risen “significantly,” they said.

Gross domestic product grew 1.8 percent in the first quarter from a year earlier, less than the 2.1 percent median forecast of analysts surveyed by Bloomberg. Compared with the previous quarter, the economy grew 0.3 percent, the statistics agency said May 23.

Banxico cut its growth forecast to between 2.3 percent to 3.3 percent last month from a previous estimate of 3 percent to 4 percent.

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