MexECON Blog

January CPI Rises 3.8 Percent YOY

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
CPI 1101

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