MexECON Blog

May CPI Rises 3.5 Percent YOY

Mexico's May consumer price index (CPI) was up 3.5% from the same month one year earlier, matching the increase in the year to April.  Inflation in Mexico therefore remains at its lowest since last autumn.  Despite stability in the overall inflation rate, however, there was significant variability in the key subindexes.  Excluding the volatile categories of fresh foods, energy, and government-set prices, the May "core" CPI was up just 3.0% year-over-year, after a rise of 3.1% in April.  Inflation for core goods accelerated, but that was more than offset by slower price increases for core services.  Meanwhile, non-core prices accelerated to show a 5.2% increase, owing to higher prices for both fresh foods and energy.

At the wholesale level, inflation jumped yet again.  The May producer price index (PPI) was up 2.8% year-over-year, accelerating for the seventh time in the last nine months.

The report was released today by INEGI, the official statistics agency.

Comment:  Prices in Mexico surged at the beginning of 2014, mostly because of new sales taxes that took effect on January 1.  However, that impact has been dissipating.  The cooling in inflation has helped bolster consumer sentiment and could eventually encourage a rebound in consumer spending as well.  If so, it would provide added energy to the overall economy and spur faster growth.  Cooling inflation was also one reason policymakers at Banco de México felt comfortable slashing interest rates on Friday in their own effort to boost the economy.  The question is how far inflation will actually fall.  The failure of consumer inflation to moderate any further in May should be a caution sign.  Just as important, the strong uptrend in prices at the wholesale level could put renewed upward pressure on retail prices if producers find that they can pass their higher costs on to the consumer.  That would be especially true if producer inflation begins to outpace consumer inflation.  Finally, if the central bank's unexpected rate cut continues to put downward pressure on the peso, the higher cost of imports will tend to keep inflation higher than it otherwise would be.  There is therefore some risk that inflation will not fall far enough to give a significant impetus to consumer spending.  That is another reason to think that Mexican economic growth could remain muted for a while longer.

Patrick Fearon, CFA
Vice President, Fund Management

CPI 1405

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