Mexico Posts Second-Slowest Year-End Inflation Since the 1970s

(Bloomberg) -- Mexico closed 2019 with the second-lowest year-end inflation rate in at least five decades amid a stalled economy, solidifying bets the central bank will keep cutting interest rates in 2020.

Consumer prices rose 2.83% from the previous year in December, the statistics agency reported Thursday, more than the 2.78% forecast in a Bloomberg survey of economists. Prices rose 0.56% from the previous month. Mexico’s central bank targets inflation at 3%, plus or minus one percentage point.

Mexico’s November index of leading economic indicators rose 0.1%, the most since June 2017, after growing a mere 0.01% the previous month.

Key Insights

• Banco de Mexico cut the key interest rate by a quarter point for a fourth straight time to 7.25% on Dec. 19 and is expected to ease again by the same amount in February, ending the year at 6.50%.
• Central bank Governor Alejandro Diaz de Leon said in an interview Dec. 23 that Banxico is prepared to take monetary-policy action as soon as February if it sees that inflation and internal and external risks remain low.
• A 20% boost to Mexico’s minimum wage this year could have a negative impact on the country’s labor market just as the economy struggles with stagnation, some central bank members said in the minutes to their Dec. 19 rate decision

What Our Economist Says

“Lower inflation in December was again mainly explained by non-core prices that should be close to the bottom and are likely to increase and are a risk. Results also showed core inflation extended its moderate downtrend, in line with central bank forecasts that anticipate core inflation will continue falling in 2020. Results were not enough to ease concerns about resilient services prices despite weak domestic demand and increasing economic slack and suggest policy makers are likely to continue cutting rates but keep a cautious tone.”

--Felipe Hernandez, Latin America economist for Bloomberg Economics

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• Core prices rose 0.41% in December from a month earlier, in line with estimates in a Bloomberg survey
• After inflation reached 2.13% in December 2015, last year saw the lowest year-end inflation level since at least 1970, according to Bloomberg data
• Food, beverage and tobacco inflation came was an above-target 4.45% as were education costs at 4.73%, while energy prices fell 0.54% from the previous year

--With assistance from Rafael Gayol.

To contact the reporter on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Robert Jameson, Walter Brandimarte

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