| | |  Business News 
Mexico GDP Growth to Be Curbed by Faster Inflation
 Carlos Manuel Rodriguez - Bloomberg
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January 04, 2010
 |  | The average price of tortillas, a staple in Mexicans’ diets and the biggest food component in the consumer price index, increased 4 percent to 9 pesos a kilogram (2.2 pounds) last week in Mexico City. |  | | |
Mexican inflation is poised to jump from a three-year low as the government raises taxes and pushes up gasoline and subway prices, eroding consumers’ purchasing power and cutting into a recovery, according to Actinver SA.
Annual inflation will quicken to 4.1 percent in the first quarter and 4.9 percent by the end of 2010 from 3.9 percent in November after sales, income and corporate tax increases took effect Jan. 1, said Jaime Ascencio, a fixed-income analyst at Actinver, the nation’s biggest independent money manager.
That pickup will limit the expansion in Latin America’s second-biggest economy to 3 percent, less than the 5 percent to 6 percent growth rate that the country should post as it rebounds from the worst recession since the Great Depression, he said. The government also forecasts 3 percent growth, lagging behind the recovery in the region’s biggest economy, Brazil, where the central bank predicts a 5.8 percent expansion.
“The recovery for the Mexican economy will be less than expected because of higher costs,” Ascencio said in an interview from Mexico City.
Economists predict the central bank will start raising the benchmark lending rate in June to stem inflation, according to a survey published Dec. 21 by Citigroup Inc.’s Banamex unit.
Central bank Governor Agustin Carstens, who took over Banco de Mexico last month after serving as finance minister for three years, will raise the rate 1 percentage point by year-end from 4.5 percent, the lowest level since policy makers began targeting the rate in 2005, according to the survey. The bank cut benchmark borrowing costs 3.75 percentage points last year to help pull the economy out of recession.
Gasoline, Tortillas
President Felipe Calderon pushed the tax increases through congress to help offset a decline in output at the state oil company. Congress approved a 1 percentage-point increase in the sales tax for most products to 16 percent while boosting income and corporate taxes 2 points to a maximum of 30 percent. New levies were introduced on pay-TV service and most phone service.
The central bank predicts annual inflation will climb to as high as 4.75 percent in the first quarter, 5 percent in the second quarter and 5.25 percent in the third and fourth quarters. The bank is due to release the December inflation report on Jan. 7. Economists estimate the annual rate fell to 3.6 percent in the month, the lowest since August 2006, according to the median of five forecasts in a Bloomberg survey.
‘For Now’
The decline may be short-lived as the government-ordered gasoline price increases threaten to spark higher costs throughout the economy, said Sergio Luna, an economist with Citigroup Inc.’s Banamex unit in Mexico City. The average price of tortillas, a staple in Mexicans’ diets and the biggest food component in the consumer price index, increased 4 percent to 9 pesos a kilogram (2.2 pounds) last week in Mexico City.
The price of low-grade gasoline has risen 16 centavos, or 2.1 percent, since Dec. 22 to 7.88 pesos ($0.60) per liter. Mexico City’s government also increased subway fares by 50 percent on Jan. 2 to 3 pesos. Luna said he’s been caught by surprise by the pace of the fuel increases.
They “are coming faster than we expected and therefore may have a stronger impact on inflation,” Luna said in a telephone interview from Mexico City. He said he’s sticking with his 2010 inflation forecast of 4.8 percent “for now.”
Markets Last Week
Mexico’s benchmark Bolsa stock index declined 1.3 percent to 32,120.47. The peso weakened 1.7 percent to 13.1012 per dollar. Yields on Mexico’s benchmark peso bond due 2024 rose six basis points, or 0.06 percentage point, to 8.27 percent, according to Banco Santander SA.
carlosmr(at)bloomberg.net
With assistance from Jens Erik Gould in Mexico City. Editors: Brendan Walsh, David Papadopoulos (papadopoulos(at)bloomberg.net).
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