Mexico Consumer Prices Rise in June After Interest Rate Cut

Mexican consumer prices rose for the first time in three months in June on a pickup in services and processed food costs after the central bank unexpectedly cut the key interest rate last month.

Prices increased 0.17 percent from a month earlier, the national statistics institute said on its website today, compared with the 0.2 percent median forecast of 21 economists surveyed by Bloomberg. The annual inflation rate climbed to 3.75 percent, the highest level since March, while remaining below the 4 percent upper limit of the bank’s target range.

The central bank last month cut its benchmark rate half a point to a record low 3 percent to bolster growth that missed economists’ forecasts in seven of the past eight quarters. Banco de Mexico said additional cuts aren’t recommended in the foreseeable future and forecast that economist growth will accelerate. Policy makers will leave rates unchanged on July 11, according to all 22 analysts surveyed by Bloomberg.

“Overall we have a relatively benign inflationary backdrop, which is not surprising given how weak the economy has been,” Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc. in New York, said in a phone interview. Banxico will leave rates unchanged until the middle of next year, when it’s likely to increase borrowing costs, he said.

Price Increases

The central bank forecast 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 3 percent in early 2015. The bank targets inflation of 3 percent, plus or minus one percentage point.

The peso declined 0.2 percent to 13.0033 per U.S. dollar at 8:50 a.m. in Mexico City. The yield on inflation-linked bonds due in June 2016 increased 0.02 percentage point to negative 0.01 percent, according to data compiled by Bloomberg.

Core prices, which exclude energy and farm costs, increased 0.21 percent in June from a month earlier, less than the 0.24 percent forecast by analysts. Core prices increased 3.09 percent from a year earlier, compared with a 5.96 percent jump in more volatile non-core prices.

Services costs climbed 0.25 percent from a month earlier.

Inflation slowed to 3.5 percent in April from an eight-month high of 4.48 percent in January as the effect of new taxes waned. 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 1-peso-per liter duty on soft drinks.

Higher Taxes

The tax increase damped growth, with the consumer confidence index falling to the lowest level in almost four years in January. It continues to languish below year-ago levels even after a rebound in recent months.

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 2014 growth forecast to 2.3 percent to 3.3 percent in May from a previous estimate of 3 percent to 4 percent.

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