Mexico inflation eases in August, still above goal

Sep 7, 2007 - Mexican annual inflation slowed to 4.03 percent in August, but remained above the central bank's target range, and analysts expected to bank to maintain its bias toward higher interest rates.

The central bank said the consumer price index rose 0.41 percent in August, matching the median forecast in a Reuters poll.

Closely watched core inflation, which strips out some volatile food and energy prices, was 0.21 percent in August compared with 0.34 percent in July.

Prices for some foods and vegetables grew less quickly in August than in previous months, the bank said.

Some analysts say that if the U.S. Federal Reserve cuts its benchmark fed funds rate on Sept. 18 in response to a growing credit crunch in the United States, Mexico's central bank might feel less need to maintain a bias toward tighter monetary policy.

But others say possible rises in food and vegetable prices from recent hurricanes, as well as expected higher taxes from a planned fiscal reform, mean significant inflation risks remain.

"I think this means they keep the tightening bias," said Francisco Diez, director of emerging markets trading at RBC in Toronto, after the monthly inflation report came out.

Consumer prices rose 0.42 in July and annual inflation was 4.14 percent.

All economists consulted by Reuters expect the bank to keep its key interest rate steady at 7.25 percent at its monthly monetary policy review on Sept. 21.

Mexico's central bank has held the rate unchanged but maintained a tightening since a surprise 25 basis point hike last April.

The central bank's 12-month inflation target is 3 percent, but it considers inflation up to 4 percent acceptable.

Hurricane Henriette raged over farming states in northern Mexico this week, where a storm last year damaged tomato crops and pushed up prices.

For months, rising prices of fruits and vegetables, as well as high costs for dairy products around the world, have fueled inflation in Mexico.

The August annual rate was in line with the bank's forecast in July that annual overall inflation would be between 3.75 percent and 4.25 percent in the third quarter.

But 12-month inflation should come back down to between 3.25 percent and 3.75 percent in the fourth quarter and 3 percent by the end of 2008, according to the bank.