In a report last week, Mexico's January consumer price index
(CPI) was up just 3.8% from the same month one year earlier.
That marked a significant deceleration after three straight months
in which year-over-year price increases were at 4.0% or more.
According to the report, from Banco de México, the slowdown in
inflation primarily reflected tax hikes and increases in
administratively-established prices in January 2010, as well as
lower food prices compared with December 2010. Despite the
reduction in food prices, however, volatile "non-core" prices
continue to have a big impact on Mexico's inflation rate.
Excluding the volatile categories of food, energy, and
administratively-determined prices, the January core CPI was up
just 3.3% year-over-year, for its smallest increase since June
2006. The January producer price index (PPI) was up 3.5%
year-over-year, after a rise of 3.7% in the year to December.
Comment: Until January, Mexico
was experiencing the same accelerating inflation that many other
large, developing countries are experiencing. The big
question is whether the slowdown in inflation during January will
be sustained. With strong economic growth in Mexico and loose
monetary policies in many developed countries, there is a high risk
that Mexican inflation will worsen again in the coming
months. The extraordinary freezes that destroyed crops in key
Mexican agricultural regions during early February are also likely
to drive up food prices again. If so, it could be difficult
for Banco de México to meet its goal of cutting consumer inflation
to 3.0% by the end of 2011. The policymakers could even be
forced to raise interest rates sooner than they otherwise would,
which would put further upward pressure on the peso and raise the
risk of slowing the economy too much.
Patrick Fearon, CFA
Vice President, Fund Management
Mexico's Consumer Price Index (CPI)
Percent Change, Year-Over-Year
Source: Banco de México