UPDATE 2-Mexico annual inflation rate hits 6-month high in Dec

Thu Jan 9, 2014 11:12am EST

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MEXICO CITY Jan 9 (Reuters) - Mexican inflation quickened in December to a six-month high on a spike in subway fares in the capital city and a jump in tomato prices, but tamer underlying price pressures suggest interest rates will likely remain on hold this year.

Inflation in the 12 months through December rose to 3.97 percent, the national statistics institute INEGI said on Thursday, marking the fastest pace since June.

The annual inflation result beat forecasts for a 3.91 percent rise and was above November's 3.62 percent pace.

Mexico's central bank targets a 3 percent inflation rate, but is comfortable with a rate of up to 4 percent.

The central bank held interest rates at a record low last month, citing tame inflation and a fragile economic recovery.

The economy picked up in the third quarter of 2013 after a sharp slowdown and policymakers have said that inflation will hover around 3.5 percent this year.

A poll released by Banamex on Tuesday shows most analysts see interest rates steady into 2015.

In the month of December alone, consumer prices rose 0.57 percent, above expectations for a 0.53 percent rise but below the 0.93 percent jump notched in November.

INEGI said the largest driver of inflation was a jump in the price of tomatoes, a staple in Mexican cooking.

Also notable was the rise in Mexico City subway fares, which went from three pesos to five pesos (23 U.S. cents to 37 U.S. cents) a ride.

Gasoline prices also rose as the federal government slowly removes fuel subsidies.

Luis Videgaray, Mexico's finance minister, said he did not expect the increase in gasoline prices to fan inflation over the long term.

"It's a transitory impact," he told local TV. "We expect inflation to remain within Banco de Mexico's tolerance band and that Mexico will remain a low-inflation country."

Inflation last year came in just below the central bank's 4 percent ceiling.

But analysts from Barclays and Goldman Sachs said they expect price increases to accelerate in January, as a fiscal reform, which imposes new taxes on fuels, sodas, and junk food, takes effect.

"We expect these tax changes to ultimately turn into once-off changes in relative prices with limited second round effects on other prices in the economy given the still subdued domestic demand conditions and significant amount of slack in the economy," Goldman Sachs economist Alberto Ramos said in a client note.

Core prices, which strip out volatile food and energy costs, rose 0.33 percent, below the 0.35 percent expected in the poll and the 0.14 percent rate reached the prior month.

Mexico's finance ministry says the economy likely grew just 1.3 percent last year, after contracting in the second quarter.

The central bank sees the economy expanding by 3 to 4 percent this year.

An economic activity indicator released on Thursday by INEGI showed Mexico's economy grew 0.30 percent in October from September, as farming rebounded strongly and the services and industrial sectors also returned to growth. Compared to October 2012, economic activity expanded 1.33 percent.

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