Mexico Inflation Revival Shows Peso Drop Trickles Down to Prices

  • Currency’s 30% drop in two years is pushing up price of goods
  • BofA and BBVA say investors should buy inflation-linked bonds

Bank of America Corp. and BBVA Bancomer SA are telling clients to pile into Mexico’s inflation-linked bonds as a deepening slide in the peso drives up the costs of goods.

Prices for everything from jewelry to medicine jumped 3.5 percent in May from a year earlier, the most since November 2014. That signals the peso’s 31 percent plunge in the past two years is starting to fan an increase in living expenses in Latin America’s second-biggest economy, said Bank of America chief Mexico economist Carlos Capistran.

For the past year, Mexico’s inflation rate has remained well below the central bank’s 3 percent target and even reached a four-decade low in December despite the currency’s slide. Now, policy makers who last year highlighted the diminishing pass-through, or link, between the peso and consumer prices are expected to boost the key interest rate from 3.75 percent later this month to preserve financial stability and keep inflation in check.

“It’s the beginning of higher pass-through from the peso," Capistran said. “We are starting to see a more marked effect on the prices of merchandise.”

He forecasts annual inflation will quicken to 3.3 percent by the end of the year from 2.6 percent in May. Bank of America is advising clients to buy Mexico’s inflation-linked bonds due in 2025 and sell the nation’s 10-year fixed-rate notes.

The peso has tumbled 8.3 percent this year as of 9:25 a.m. in New York on Monday, the biggest drop among emerging-market currencies.

Pedro Uriz, a strategist at BBVA, recommends snapping up Mexican inflation-linked bonds due in 2019 and selling the fixed-rate notes. BBVA predicts price increases will accelerate to 2.9 percent by year-end.

“The implicit inflation expectations were excessively low,” Uriz said. “The pass-through is focused on goods, but given the weakness in the exchange rate, we could see more of it.”

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