UPDATE 3-Mexico inflation rises in May but still in check

Thu Jun 7, 2012 11:11am EDT

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* Inflation up at 3.85 percent in May, year on year

* Analysts say no impact yet from weak peso

* Central bank seen keeping interest rates on hold

MEXICO CITY, June 7 (Reuters) - Mexican inflation accelerated more than expected in May, but the rise is unlikely to push the central bank into changing benchmark borrowing costs.

The annual inflation rate rose to 3.85 percent in May, the national statistics agency said on Thursday, above analysts' expectations of 3.75 percent in a Reuters poll, and up from 3.71 percent in the first half of the month.

The latest data is a further step away from the central bank's 3-percent long-term inflation goal, even though consumer prices fell month-on-month for a second month in a row.

Analysts polled by Reuters last week were unanimous in expecting the central bank, which says it can live with inflation of up to 4 percent, to keep benchmark interest rates on hold at 4.5 percent on Friday, and most see no change through 2013. Mexican rates have been unchanged since 2009.

Although several policymakers have said they would favor a cut to support a gradual recovery from 2009's deep recession, a slump in the peso to a three-year low last week has fanned concerns about possible price pressures.

However, there is no sign so far of the weak peso raising prices of imported goods. The biggest price increase in the month was in fruit and vegetables, with a knock-on effect on processed foods, but these were offset by a drop in electricity prices due to summer subsidies.

Analysts said the rise in inflation also reflected statistical base effects from May last year, when headline prices fell by the largest amount on record, and price pressures were contained.

"It doesn't change our view that the inflation outlook remains benign, there's very little pricing power in the economy," said Standard Chartered economist Italo Lombardi.

"It really shows how much slack there still is in Mexico."

Producer price inflation accelerated to 5.55 percent, from 5.16 percent in April, with the biggest increase in the primary sector, separate data showed.

While consumer price inflation is likely to trend higher in the coming months, it should fall back to 3.65 percent by the end of the year, according to a monthly central bank poll of analysts.

The latest inflation data showed consumer prices had fallen 0.32 percent in May. Analysts had forecast a 0.39 percent drop, according to a Reuters poll.

The Banco de Mexico has been looking closely at core services inflation, which shows domestic price pressures. Although this rose in the month and the annual rate accelerated to 2.63 percent, it remains contained.

The goods component of the core index, which should show the biggest impact from a weaker peso, decelerated to a 0.30 percent increase on a monthly basis although the annual rate of 4.5 percent was above the central bank's tolerance level for inflation.

The overall core price index, which strips out some volatile food and energy prices, rose 0.27 percent during May from 0.15 percent in April, broadly in line with analysts' expectations.

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