Mexico Inflation Slows More Than Expected on Price Controls

Mexico’s annual inflation eased to its slowest pace since March as the government implemented price controls on liquefied petroleum gas used in homes and businesses.

Consumer prices rose 5.58% in the first half of August from a year earlier, less than the 5.86% reading in late July, the national statistics institute reported on Tuesday. The result was also below the 5.66% median estimate of analysts surveyed by Bloomberg. Prices fell 0.02% from the second half of July. 

Mexico Inflation Slows More Than Expected on Price Controls

Mexico’s central bank, known as Banxico, raised its key interest rate for a second consecutive meeting earlier this month, to 4.5%. Economists say that the Energy Regulatory Commission’s price limits, implemented at President Andres Manuel Lopez Obrador’s behest, are likely to be temporary. At the same time, the caps have acted as a counterweight to pressures such as rising food costs.

“The effect of LPG is a one-time thing,” said Enrique Covarrubias, chief economist at Actinver. “If it had not been for that, inflation would have been higher than it had been historically, not too far from 6%.”

Fruits and vegetables jumped 2.33% compared to the end of July, with serrano peppers surging by 26.78% and avocados rising by 8.98%. Domestic gas fell 15.06% during the period, according to the statistics institute.

Core inflation remained under pressure, accelerating to 0.28% in comparison to 0.13% two weeks before. The core rate also reached its highest year-on-year level since the end of 2017. 

“While that was partly due to a further rise in inflation in the food products that are included in the core measure, inflation of core non-food goods also rose,” William Jackson, chief emerging markets economist at Capital Economics, wrote in a report.

Interest Rates

Some analysts have predicted the central bank will deliver a tightening cycle through the rest of the year in order to keep inflation in check, though the five-member board has been split over policy at its last two meetings.

The economy has rebounded sharply in 2021, posting a 19.7% jump in gross domestic product in the second quarter from a year earlier and a quarterly rise of 1.5%.

Annual inflation reached a peak of 6.1% in April, before declining in the following months. It has still remained well above the central bank’s target of 3%, plus or minus one percentage point.

“Medium-term core inflation is where monetary policy acts at its fullest,” said Covarrubias. “We should expect at least three 25bps hikes over their next four meetings.”

Going forward, central bank Governor Alejandro Diaz de Leon will step down at the end of his term in December, and Lopez Obrador has nominated former Finance Minister Arturo Herrera to replace him.

The change in constituents could alter the decisions of the board, which has maintained a 3-2 division in the last two meetings, with members Galia Borja and Gerardo Esquivel opposed to tightening. The central bank meets next on Sept. 30, and then in November and December.

©2021 Bloomberg L.P.

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