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Mexico Inflation Rises Faster Than Expected

Mexico Inflation Rises Faster Than ExpectedMexico Inflation Rises Faster Than Expected

Mexico’s annual inflation accelerated faster than expected in early December and reached its highest level in two years, stoked higher partly by a weak peso that has pushed policymakers to raise borrowing costs.   

Inflation in the 12 months through mid-December was 3.48%, the national statistics institute said on Thursday, the highest half-month reading since December 2014, Econotimes reported.

A Reuters poll had projected the rate would accelerate to 3.42% from 3.29% in early November. Mexico’s central bank targets inflation of 3%.

Last week, Mexico’s central bank raised its benchmark interest rate by 50 basis points to 5.75% in a bid to cool inflation after the peso fell to record lows following Donald Trump’s Nov. 8 US election victory.

It was the fifth rate hike this year by policymakers who are concerned the weak peso could push consumer prices higher. The central bank expects the inflation rate to rise toward 4% next year before easing back toward its target in 2018.

The annual reading of the core price index, which strips out some volatile food and energy prices, rose to 3.46% in early December, above a forecast 3.30% and 3.33% in early November.

The core index reflects higher goods costs as the weak peso drives up import prices. On a monthly basis, Mexican consumer prices rose 0.42% during the first half of December, while the core price index climbed 0.47% in early December.

Data showed higher airplane ticket and tourism package costs drove much of the increase in prices.

Separate data showed the pace of economic activity slowed in October from the previous month as output from the services sector slowed and industrial production remained sluggish.

Trump’s election is a significant factor of uncertainty for the Mexican economy. Mexico’s foreign trade (renegotiation of NAFTA) and immigration are likely to be impacted. Owing to the high budget deficit, fiscal policy has little leeway for economic stimuli.

The Mexican central bank, on the other hand, will have to continue its restrictive monetary policy to prevent a notable increase in consumer prices due to a weak peso. This will weigh on private consumption–an important pillar of economic growth. Mexico’s GDP growth is expected to slow further in 2017.

Analysts at BNP Paribas expects real GDP growth in Mexico to slow from about 2% this year to close to 0% in 2017, as BNPP suspects balance-of-payment conditions will deteriorate more than most observers seem willing to admit.

 

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