| | |  Business News | July 2008 
Mexico Inflation Jumps to Highest Since Late 2004
 Jason Lange & Michael O'Boyle - Reuters
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Mexico City Mexican inflation jumped in June to its fastest pace in over three years on higher food and energy prices, increasing pressure on the central bank to raise borrowing costs despite a slowing economy.
The central bank said Wednesday that consumer prices rose 5.26 percent in the 12 months through June the highest inflation rate since November 2004. The May rate was 4.95 percent.
The reading was in line with expectations and reinforced bets made by investors in recent weeks that the central bank will raise interest rates as soon as next week. The peso currency firmed 0.33 percent to 10.304 per dollar.
This kind of cements expectations that the central bank will hike, said Bertrand Delgado, an economist at research firm IDEAglobal in New York.
The quickening pace of inflation comes as the economy is starting to slow, hurt by weaker growth in the United States, Mexico's top trading partner.
The economy expanded at an annual pace of 3.7 percent in the first quarter, discounting the effect of Holy Week holidays, down from 4.2 percent in the fourth quarter of 2007.
The central bank increased its benchmark overnight interest rate in June by 25 basis points to 7.75 percent. Delgado said he sees policy-makers raising interest rates by another 25 basis points next week.
Inflation across Latin America has jumped this year, driven by higher demand for grains in fast-developing countries such as China and by the expansion of the biofuel industry.
It is relevant to point out that food continues with its upward trend, the central bank said in its price report.
Food prices have jumped 9.51 percent in the year through June, central bank data showed.
ENERGY PRICES
The central bank said government-set prices for energy and energy-related services like gasoline, electricity and public transportation also fueled the rise.
The government has been quickening the pace of gasoline price increases since April despite massive subsidies aimed at shielding consumers from rising international oil prices. Mexico imports about 40 percent of its gasoline.
That has stirred fears among investors that inflation could quicken.
In the coming months we should be alert about the risks of adjustments in gasoline prices as well in cooking gas and electricity, said Cecilia Posadas Perez, an analyst at BBVA Bancomer.
The government's head of spending, Dionisio Perez-Jacome, on Wednesday said the rise in gasoline prices would have a minimal impact on inflation.
Economists say the subsidies are a major reason why inflation has been slower in Mexico than in much of the rest of Latin America.
The risks are that they will need to hike (interest rates) even more down the road, said Rodrigo Valdes, chief economist for Latin America at Barclays Capital.
Consumer prices rose 0.41 percent in June, close to the 0.42 percent reading predicted by analysts in a Reuters poll.
Closely watched core inflation, which strips out some volatile food and energy prices, was 0.45 percent during the month. Analysts had expected a 0.43 percent increase.
(Editing by Leslie Adler) |
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