MexECON Blog

Inflation Falls to Central Bank Goal

Mexico's March consumer price index (CPI) was up just 3.0% from the same month one year earlier, decelerating sharply from the year-over-year gains of 3.6% in February, 3.8% in January, and 4.4% in December.  In fact, Mexico's inflation rate has now fallen to less than half its most recent peak of 6.5% in December 2008, and it stands at its lowest rate in almost five years.  According to the report, from Banco de México, the slowdown in inflation during March stemmed primarily from falling prices for certain fresh foods.  Excluding the volatile categories of food, energy, and administratively-determined prices, the March "core" CPI was up 3.2% year-over-year, after a gain of 3.3% the previous month.  The March producer price index (PPI) was up 3.4% year-over-year.

Comment:  With its extraordinary deceleration last month, Mexican inflation has now fallen to the central bank's target rate.  However, there are plenty of reasons to suspect price increases could accelerate again before settling at targeted levels for an extended period.  If volatile food and energy prices rebound again, they could pull the inflation rate back up.  Moreover, the fact that core inflation is running ahead of the headline figure suggests there are still significant price pressures throughout the Mexican economy.  Finally, faster price rises at the producer level will likely prompt Mexican firms to try to raise consumer prices at a faster clip.  Nevertheless, the general picture still shows Mexican prices settling down, and that should allow Banco de México to keep interest rates at their current low levels in order to support the country's economic recovery and take some upward pressure off the peso.

Patrick Fearon, CFA
Vice President, Fund Management

                              Mexican Consumer Price Index (CPI)
                         Percent Change, Year-Over-Year
                              Source:  Banco de México
CPI 1103

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