Mexican Inflation Gained Speed in Early May -- Update

By Anthony Harrup Features Dow Jones Newswires

Mexico's annual inflation rate continued to accelerate in the first half of May despite seasonal respite from a cut in residential electricity rates, reaching its fastest pace since mid-April 2009.

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The consumer-price index fell 0.38% in the first two weeks of the month, but the annual inflation rate rose to 6.17% from 5.82% at the end of April and 2.53% a year before, the National Statistics Institute said Wednesday.

Energy costs fell at the start of the month as summertime electricity subsidies to help cover the cost of air conditioning in hot northern cities went into effect. That was partly offset by increases in prices of goods affected by the depreciation of the Mexican peso, and by a jump in Mexico City bus fares that was authorized in April to compensate for January's sharp rise in gasoline and diesel prices.

Core CPI, which excludes energy, fresh fruit and vegetables, and government-controlled tariffs, rose 0.15% in the first half of May to an annual rate of 4.75%. Core goods prices were up an annual 6.24%, while services were just 3.49% higher.

Inflation has been above the Bank of Mexico's 2%-4% target band since January, prompting the central bank to raise interest rates further. The bank lifted the overnight interest rate target by a quarter percentage point last week to 6.75%, the sixth consecutive meeting at which it raised rates.

The limited impact of the weaker currency on consumer prices reflects in part confidence that the central bank can meet its inflation targets, said Fiona Mackie, regional director for Latin America at The Economist Intelligence Unit.

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"The Bank of Mexico has a good reputation for surprising the markets to actually show its determination to fight inflation," she said.

Banks surveyed this week by Citibanamex increased their median estimate for year-end inflation to 5.74% from 5.60% two weeks before.

"Although there has been some rise in 12-month ahead inflation expectations in Mexico, it's been pretty modest if you look at 24 months ahead," Ms. Mackie said. "There has been some pass-through, but a much bigger effect in the overall CPI has been that one-off effect of the energy price increases at the start of the year."

While the May numbers show little sign of inflation abating, the impact of previous declines in the peso should start to fade given recent peso gains, said Adam Collins, Latin America economist at Capital Economics, in a note. "So long as the currency remains stable, we don't think the headline rate has much further to rise."

Write to Anthony Harrup at anthony.harrup@wsj.com

(END) Dow Jones Newswires

May 24, 2017 11:25 ET (15:25 GMT)