Mexican inflation seen spiking due to fuel price hike

© Reuters. A woman walks next to fuel pumps at Pemex gas station in Mexico City© Reuters. A woman walks next to fuel pumps at Pemex gas station in Mexico City

MEXICO CITY (Reuters) – The Mexican government’s announcement that it will hike gasoline prices by up as much as one-fifth next month has prompted economists to begin raising 2017 inflation forecasts, putting the central bank’s target rate in increasing doubt.

Mexican bank Banorte hiked its 2017 inflation outlook to 4.7 percent from 4.3 percent after the finance ministry said on Tuesday that new January price ceilings would be 14.2 percent to 20.1 percent above December’s highest recorded prices.

Brokerage Finamex, which will soon revise upward its 4.5 percent inflation forecast for 2017, said the fuel price hikes would increase the consumer price index by 0.8 percent in the first half of January compared with the last half of December.

Mexico’s central bank this month hiked interest rates for a fifth time this year to curb inflation that is already running above the central bank’s 3 percent target. Inflation has been fanned by a slump in the peso currency following Donald Trump’s U.S. presidential victory.

“The challenge for monetary policy in 2017 is enormous,” Finamex said in a client note, forecasting that central bank rate hikes will continue into next year.

Brokerage Vector said it would raise its inflation forecast for January, but it did not say by how much.

Invitations to a Mexico City protest and a gasoline boycott circulated on social networks, while Concamin, a Mexican industry association, expressed concern that the move would create added headwinds for local businesses.

Finance Minister Jose Antonio Meade defended the fuel price hike, arguing that keeping gasoline costs artificially low following an increase in international oil prices was too expensive for public finances.

“We couldn’t keep doing it,” he said on television.

Oil prices have surged about 50 percent this year after plunging to multi-year lows in January.

In the first half of December, annual inflation accelerated to 3.48 percent, its fastest pace in two years. The central bank raised interest rates to 5.75 percent this month, the highest since April 2009.

The bank expects inflation to accelerate further in 2017 without exceeding its 4 percent tolerance ceiling.

Inflation concerns aside, some economists saw a silver lining to the gas price rise, which is part of a program to end decades of government-set prices at the pump.

“Despite the distortions generated by this increase, the gasoline price liberalization is part of the country’s efforts to incentivize the free market, even though it would have been better to do it gradually,” Banorte said.

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