Mexico’s Inflation Hits 6%, Fueling Rate-Hike Pressure

(Bloomberg) -- Mexico’s annual inflation accelerated to double its target in September, stoking pressure on the central bank to keep tightening monetary policy.

Consumer prices jumped 6% compared with a year earlier, more than the 5.59% seen in August and in line with economist forecasts in a Bloomberg survey. Monthly inflation accelerated to 0.62% after a 0.19% rise in August, the national statistics institute reported Thursday.

Annual core inflation, which excludes volatile items such as fuel, reached 4.92% in comparison with 4.78% in August. 

Mexico’s central bank, known as Banxico, hiked its key interest rate by a quarter point for a third consecutive meeting in September, bringing it to 4.75%. Deputy Governor Irene Espinosa said in an interview with Bloomberg Television earlier this month that shes sees no immediate need for a 50 basis-point increase but the bank remains data-dependent.

Banxico targets inflation at 3%, plus or minus 1 percentage point.

The bank’s five-member board has been divided in its recent decisions, but four members voted in favor of the hike in September, after Deputy Governor Galia Borja joined the pro-tightening camp. That was seen by investors as a sign that additional hikes are likely during the next meetings in November and December, potentially bringing the key rate to 5.25%.

“The picture will remain fairly challenging in the coming months,” said Andres Abadia, chief Latin America economist at Pantheon Macroeconomics. “With the start of tapering by the Fed, it’s likely that Banxico will remain cautious and will continue raising its key rate.”

Following the release of the data, Capital Economics forecast the central bank will boost the benchmark rate to 6% by the second quarter of 2022.

Spreading Inflation

The increase in core prices suggest inflation shocks are spreading through the wider economy. Supply-chain disruptions have made goods in high demand more expensive. Though Mexico instituted a cap on cooking gas prices in August and the president vowed to keep it in place, that wasn’t enough to damp the effect of globally rising energy costs. 

“There’s a shortage of raw materials in the international economy,” said Janneth Quiroz Zamora, vice president of economic research at Monex Casa de Bolsa. “One of the arguments of the governors in past sessions has been that, while those external price pressure have not been avoided, by raising the rate they can contribute to there not being a contamination of the rest of the prices.”

Cooking gas prices rose 4.73% in September from the month prior and overall energy costs increased 1.13% in the same period. 

Key Insights

• In a Citibanamex survey earlier this month, economists forecast year-end inflation at 6.31%, up from their 6.10% forecast of late September
• Economists surveyed by Citibanamex also see the key rate at 5.25% by year-end, an upward revision from 5% in late September
• Banxico increased its inflation forecasts, predicting it will peak at 6.2% in the fourth quarter of this year before slowing to 3.1% in the third quarter of 2023

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