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Mexico’s inflation shows first monthly slowdown since November

Mexican Inflation 2013-04-30Enlarge Graph

Mexico’s biweekly consumer price index posted a marginal decrease month to month, marking the first deceleration in five months

Inflation, as measured by the consumer price index, is a key macroeconomic indicator since high inflation can comprise recovery and prevent the country’s central bank to adjust monetary policy to boost growth.

The biweekly consumer price index posted a 0.09% decrease versus the last two weeks of March. While the decrease is marginal, the last two decreases had been observed in the last two weeks of October and November.

Mexican inflation is now at 4.7%, which represents an eight month high, and for this reason even a minor decrease may give investors some hope that inflation will ease. Lower inflation would allow the government to pursue more aggressive monetary policy to boost the economy, but that is only possible until inflation changes its course.

Inflation, excluding agricultural products and energy, remains low at around 3%. Fruits and vegetables have skyrocketed 27%, and meat products 12%. Energy inflation remains elevated as well at 6.5%, which raises costs around the whole economy.

While the drop in inflation is beneficial, it lines up along with several other macroeconomic indicators that signals the economy slowing down. The main culprit of this is the reduced trade with the U.S., which is its main trading partner.

Right now, there is too much uncertainty in the Mexican market, which is already trading at a very rich valuation relative to its growth prospects and country risk rating. Additionally, the only catalyst in the short-term would be a strong recovery in the U.S., but that will be greeted with a phasing out of quantitative easing, so perhaps it would not even be as strong.

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