MexECON Blog

May CPI Rises 3.9 Percent YOY

In a report on Wednesday, Mexico's May consumer price index (CPI) was up 3.9% from the same month one year earlier.  That marked the second straight month of improvement, after inflation of 4.3% in the year to April and 5.0% in the year to March.  On a month-over-month basis, Mexico's CPI fell 0.6% in May, primarily as a result of lower prices for electricity, natural gas, and some agricultural products.

Comment:  Policymakers at Banco de México have long been inclined to keep interest rates low in order to support the economic recovery, and the retreat in inflation over the last two months gives them added leeway to do so.  Because there is still slack in the Mexican economy, inflation is likely to remain under wraps for a while yet.  Therefore, the central bank will probably not raise rates again until early 2011.  Continued low interest rates are likely to be a negative for the peso, especially given that some countries have already started to raise interest rates or are preparing to do so imminently.  Nevertheless, the main reason for the peso's recent weakness is renewed risk aversion in the global financial markets in the face of possible debt defaults in Europe.

Patrick Fearon, CFA
Vice President, Fund Management

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