Unexpected spike in Mexican consumer prices prompts central bank's response

Mexico experienced a higher-than-anticipated increase in headline consumer prices, surpassing market expectations in early December. This outcome is likely to reinforce the central bank's proactive stance in addressing inflation concerns within Latin America's second-largest economy.

The country's annual inflation, reported by the statistics agency INEGI, rose to 4.46 per cent in the first half of December, exceeding the 4.32 per cent recorded in the previous two weeks. This figure also surpassed all estimates from economists polled by Reuters, with the median forecast standing at 4.36 per cent.

The Bank of Mexico, known as Banxico, recently decided to maintain interest rates at 11.25 per cent for the sixth consecutive meeting. The central bank maintained its hawkish approach, acknowledging progress in curbing inflation while highlighting ongoing challenges. Banxico has set an inflation target of 3 per cent, with a permissible deviation of one percentage point.

INEGI attributed the early December uptick in consumer prices to a notable increase in agriculture-related prices and a rise in service inflation, a factor closely monitored by policymakers. During the first half of the month alone, the headline inflation index surged by 0.52 per cent, surpassing economists' expectations of 0.4 per cent.

Despite these developments, there were positive aspects noted in the core inflation index, which excludes volatile energy and food prices. Core inflation continued to show a YoY easing, reaching 5.19 per cent, slightly below the anticipated 5.24 per cent. Core prices also increased by 0.46 per cent in early December, falling slightly short of the forecasted 0.5 per cent.

In a recent statement, Mexico's central bank governor mentioned the possibility of considering a rate cut in the first quarter of 2024. Nevertheless, caution was underscored, highlighting that any potential downward adjustments would be gradual and contingent on the prevailing economic conditions.

(With Reuters Inputs)