MEXICO CITY: Mexican inflation slowed to a record low in the first half of August as consumer prices rose less than expected following a drop in fruit and vegetable prices and a decline in vacation costs following the summer holiday period.
The consumer-price index rose 0.12% in the first two weeks of the month, pushing the 12-month rate down to 2.64% from 2.74% at the end of July, the National Statistics Institute said Monday. Core CPI, which excludes energy and fresh fruit and vegetables, rose 0.12% for an annual rate of 2.29%.
The increase in the CPI was below the 0.16% median estimate of 11 economists polled by The Wall Street Journal.
A drop in airfares and tourism packages following the summer holidays and lower prices for tomatoes and other fresh produce offset increases in education costs related to the start of the new high school and college terms.
With inflation at its lowest level on records going back to 1970, the Bank of Mexico has kept its overnight interest rate target at 3% for more than a year, while selling dollars in the exchange market in response to the peso’s fall to its weakest ever level against the U.S. dollar.
The central bank has kept open the possibility of raising interest rates before the U.S. Federal Reserve does if it sees the weaker peso having an impact on inflation or inflation expectations, although the effect has been minimal so far.
The peso slid to a new low against the U.S. currency early Monday in a global market rout following sharp losses in Chinese stocks and further declines in oil prices. The peso was quoted in Mexico City at 17.2010 to the dollar, according to Infosel, compared with 16.9750 at Friday’s close.
Bank of America Merrill Lynch said in a report that the peso’s reaction to lower oil prices is overdone, considering that Mexico has become a net oil importer this year. Mexico’s petroleum exports totaled $12.8 billion in the first half of 2015, compared with petroleum imports of $16.1 billion. Mexico exports crude oil but imports gasoline and other fuels.
“Now that Mexico imports more oil than it exports, a drop in oil prices reduces Mexico’s expenditures on oil, and the gains of oil importers outweigh the losses of oil exporters,” Merrill said.
Nevertheless, the correlation between oil prices and the peso has strengthened. That could be because the lower prices affect government revenue, erode the trade advantage of Mexico’s proximity to the U.S., and will likely reduce the amount of investment generated by the opening of the oil industry to private and foreign companies, the firm added.
