UPDATE 2-Mexico annual inflation falls from 2-1/2-year high

Thu Nov 8, 2012 11:01am EST

Related Topics

* First fall in inflation in six months

* October inflation 4.60 percent; poll 4.66 percent

* Fruit and vegetable prices ease

By Alexandra Alper and Krista Hughes

MEXICO CITY, Nov 8 (Reuters) - Mexico's annual inflation slid off a 2-1/2-year high in October, backing the central bank's forecast of an easing in the price pressures that have plagued Latin America's No. 2 economy over the last five months.

Mexican consumer prices rose 4.60 percent in the year through October, down from 4.77 percent in September and below expectations in a Reuters poll for 4.66 percent, the national statistics agency said on Thursday.

Consumer prices rose 0.51 percent last month, above the 0.44 percent rate notched in September but below the 0.57 percent expected in a Reuters poll.

Inflation has been on an upward trend since April. Despite the welcome fall in October, it was still the fifth straight month above the central bank's 4 percent tolerance limit.

On Wednesday the central bank said inflation had peaked and would end the year very close to 4 percent. But central bank governor Agustin Carsten said the bank could tighten interest rates soon if price pressures rose again - as a preventive measure.

The October data eased concerns that recent food shocks would hit prices of other less volatile goods.

"The central bank's fears didn't materialize," said Ezequiel Aguirre, currency strategist at Bank of America in New York. "We are seeing what we expected, a decrease in volatile inflation in energy and foods that is contributing to a decrease in headline and core inflation."

Inflation has been pushed upward by fresh food prices as the cost of eggs and chicken rose following an outbreak of avian flu in western Mexico and bad weather damaged crops.

But data showed a 1.41 percent drop in fruit and vegetable prices in October, which helped ease the headline rate.

The core price index, which strips out some volatile food and energy prices, rose 0.23 percent in October, compared with an expected 0.26 percent and a 0.18 percent rise in September.

Annual inflation in services, a key gauge of home-grown price pressures, was steady at 2.25 pct, and non-food core goods inflation, the most sensitive to currency fluctuations, picked up slightly to 4.00 percent.

GROWTH AND THE PESO

Banco de Mexico, which has an inflation target of 3 percent with a one percentage point tolerance band, has held interest rates at 4.5 percent since mid-2009.

Yields on Mexican interest rate swaps edged lower as investors cut bets on the chance of an interest rate hike next year.

The central bank said a stronger peso and an expected deceleration in growth in the second half of the year would help tame inflation as a global slowdown dragged on Mexico.

The peso's gain of about 6.8 percent against the dollar so far this year is one of the biggest against the greenback among 152 currencies tracked by Reuters.

The stronger peso - which has rebounded about 12 percent against the dollar after hitting a more than three-year low in early June - should help limit imported goods prices, but peso moves normally take four to six months to feed into the index.

The central bank expects growth of between 3.5 percent and 4.0 percent in 2012, an easing from the 4.3 percent rate in the first half as the global slowdown begins to bite.

Separate data on Thursday showed producer prices fell 0.02 percent in October, for an annual rate of 3.35 percent.

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