Inflation in Mexico
Annual inflation in Mexico rose more than expected in April and grew at its fastest pace in the last eight years. A sharp decrease in the peso (HEWW) last year created inflationary pressures, pushing prices up in 2017. Despite the recent rally in the peso, inflationary pressures continued to rise in May 2017. Let’s look at the inflationary trend over the last year in Mexico in the below chart.
Rising inflation in Mexico
Consumer prices in Mexico rose 5.8% year-over-year in April 2017 as compared to a 5.4% rise in March 2017 and beat market expectations of 5.7%. The inflation rate accelerated for the tenth consecutive month, reaching the highest level since May 2009. The increase in inflation was mainly driven by the cost of food and energy (IBA) (GMKKY) following the hike in gasoline prices in 1Q17.
Monetary policy decisions
The annualized inflation rate is nearly double the central bank’s target of 3%, which is not good news for consumer spending. Consumer demand has been driving the Mexican economy (UMX) for the last few years. Any slowdown in consumer spending will likely impact the country’s economic growth in 2017. The rise in inflation is expected to prompt more interest rate hikes in 2017. Also, the central bank’s stance seems to be protecting investment capital by keeping rates attractive in comparison to the US (SPY) (QQQ).
Investors can consider country-specific funds like the iShares MSCI Mexico Capped ETF (EWW), which has risen about 21% so far in 2017, as of May 24. Its top three sectors are the consumer staples, financials, and materials sectors with weights of about 24.0%, 20.9%, and 17.3%, respectively, as of April 2017.
Let’s look at rising interest rates in Mexico in our next article.