Mexico Inflation Accelerates, Bolstering Rate Hold Bets

Maya Averbuch

Mon, Jun 24, 2024, 7:00 AM3 min read

(Bloomberg) -- Mexico’s inflation accelerated more than expected in early June to move further above the central bank’s target, likely cementing a second straight pause by Banco de Mexico at its Thursday rate meeting.

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Consumer prices rose 4.78% in the first two weeks of the month from a year earlier, above the 4.73% median estimate of analysts in a Bloomberg survey and up from the 4.59% increase in the prior two-week period.

Core inflation, which excludes volatile items such as food and fuel, accelerated to 4.17% from 4.11% in the prior reading, coming in slightly lower than the 4.18% estimate. The central bank targets inflation at 3%, plus or minus one percentage point.

Food items, such as bananas and oranges, led the list of contributors to inflation in the two-week period, as drought has affected growers. Services inflation, a particular concern for central bankers, also remained stubbornly high.

“It was worse than expected because the reported increase in the fruits and vegetables component was much greater than anticipated,” said Jessica Roldan, chief economist at Casa de Bolsa Finamex. “That can last for longer not only because of of the prolonged period of dry weather that we’ve seen, but because in the future other factors — such as stronger rains in parts of the country — could also affect crops.”

Analysts surveyed by Citibanamex initially forecast that the central bank would cut rates after a pause in May left the key rate at 11%. Now, they’re predicting that the bank will wait until September to decide whether to cut as consumer prices continue to rise above the 3% target, and inflation expectations remain above that level too, affected both by summer spending and climate issues.

Additionally, the central bank must now also consider the upside risks to inflation from the peso’s depreciation, after a post-June 2 election rout sent the currency tumbling to a 15-month low.

Governor Victoria Rodriguez had said Banco de Mexico, as the bank is known, has the tools to intervene if necessary, but added that the bank does not target an optimum rate for the peso.

The inflation data comes as Mexico faces a slowing economy, but the volatility of the peso could adjust investors’ inflation expectations and force the hand of the central bank.

“The continued strength in core services inflation in Mexico in the first half of June, combined with the post-election slump in the peso and heightened political uncertainty, means that Banxico is unlikely to restart its easing cycle at Thursday’s Board meeting,” wrote Kimberley Sperrfechter, an emerging market economist at Capital Economics, in a note.

Gabriela Siller, chief economic analyst at Banco Base, said that her team thinks only one member of the five-person board could vote to cut borrowing costs, given how changes to the exchange rate could affect inflation.

“The quick depreciation of the peso could generate inflationary pressures, but they’re not always of the same magnitude, so it would be prudent to wait and see,” Siller said. “Going forward, we think that they’re going to cut twice more in the year, but toward the end of the year, when conditions are better.”

The slide in the peso was provoked in part by uncertainty about what President-elect Claudia Sheinbaum, who will take power in October, could do now that her party’s coalition has majority control of Congress. President Andres Manuel Lopez Obrador has proposed a series of constitutional changes that have worried investors and that she has supported.

Analysts surveyed by Citi said that they expect inflation to reach 4.27% by the end of 2024 and 3.8% by the end of 2025.

(Update with additional inflation data and analyst comments from fourth paragraph. A previous version corrected the current interest rate in the sixth paragraph.)