World Economy

Mexico’s Annual Inflation Cools

Mexico’s Annual Inflation CoolsMexico’s Annual Inflation Cools

Mexico’s annual inflation rate cooled in early June despite a pickup in the core number, and separate data showed on Thursday that the economy took its biggest plunge in more than five years as industry and services contracted, Reuters reported.

Despite relatively tame inflation and weak growth, a steep

slump in the peso could push policymakers to raise interest rates soon.

Inflation in the 12 months through mid-June was 2.55%, the national statistics institute said. That was below a forecast of 2.63% in a Reuters poll and the 2.6% rate at the end of May.

But the closely watched core price index, which strips out some volatile food and energy prices, crept up to nearly 3% in early June, and policymakers are concerned that a prolonged peso slump could hit inflation.

The peso is down nearly 6% against the greenback this year but has recovered somewhat this week.

A separate report showed that Mexico’s economy shrank 1.2% in April from March, the largest fall since January 2009. On an annualized basis, economic activity expanded 3%.  

Mexico’s central bank may raise interest rates at its next

meeting on June 30, but bets in the interest rate swap market are divided.

Consumer prices rose 0.02% in the first half of June, compared with expectations of 0.11%. The core price index climbed 0.16% in early June, compared with forecasts for a 0.14% increase.

The 12-month core inflation rate rose to 2.98%, slightly above the poll’s expectations of 2.96%.

The peso–already a favorite proxy for traders, has long been a lightning rod for risks because it is the most liquid currency in the emerging world, with $135 billion changing hands daily and trading 24 hours a day. Now it has moved into step with sterling in recent days as traders short the peso to mitigate the fallout from a “leave” vote in the UK’s referendum on EU membership.

The peso, which has dropped 20% against the US dollar in the past 12 months and 7% since January, has already earned the dubious distinction as the second worst-performing major emerging market currency so far this year. A ‘leave’ vote will only make things worse.