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 Business News | May 2008 
Food Prices Push Mexico Inflation to 3-Year High
 Jason Lange & Noel Randewich - Reuters
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Mexico City – Spiraling world food prices pushed Mexico's inflation to a three-year high in April, reinforcing expectations the central bank will not cut interest rates to stave off the effect of a feared U.S. recession.
Mexican consumer prices rose 4.55 percent in the 12 months through April, up from 4.25 percent in March, the central bank said Thursday.
It was the highest annual inflation reading since May 2005, when it stood at 4.60 percent.
Inflation across Latin America has jumped in recent months as rapidly developing economies like India and China boost demand for food commodities and as grains are diverted to make biofuels.
Investors in recent weeks have given up expectations that Mexico's central bank could cut interest rates to counter the effect of a feared U.S. recession.
Economists now widely expect no change in interest rates this year. But they also warn that persistently high inflation may force Mexico's central bank to hike rates.
Central bankers will closely watch upcoming data for signs of a dip in Mexico's economy, which so far has done well despite the U.S. slowdown but is expected to feel the pinch this quarter.
“If that data doesn't suggest economic growth is being impacted as much as previously expected, then I think the probability of hiking rates will increase,” said Bertrand Delgado-Calderón, senior economist at IDEAglobal in New York.
Following Thursday's inflation report, investors in interest rate futures slightly raised bets that the central bank will hike rates this year, although this scenario is still seen as a low probability.
The central bank has held its key interest rate steady at 7.50 percent since October.
Economic growth was likely 3 percent in the January-March period, the government believes. But the U.S. slowdown is expected to hit Mexico's economy soon.
Mexico's government has said it expects the economy to grow about 2.8 percent this year, down from 3.3 percent last year.
On a monthly basis, inflation in April was 0.23 percent, in line with expectations. Prices dipped a 0.06 percent in April last year.
Closely watched core inflation, which strips out some volatile food and energy prices, was 0.41 percent last month.
Mexico's peso, which has strengthened almost 4 percent this year as investors move out of U.S. Treasuries and into higher-yielding Mexican debt, was stable after the inflation report at 10.544 per dollar.
“We reiterate that the prolonged period of high interest rate differentials between Mexico and the U.S. should keep the peso supported,” Toronto Dominion Bank economist Bartosz Pawlowski said in a report.
Mexico's central bank said last week that average inflation would rise as high as 5 percent during the second and third quarters of this year, well above the 4 percent level the bank says it can tolerate.
(Additional reporting by Luis Rojas Mena; Editing by Dan Grebler) |
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