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Higher vegetable prices were one factor in higher inflation. Higher vegetable prices were one factor in higher inflation.

Inflation hit 6.77%, highest in 17 years

Annual inflation rate is expected to remain about the same for the rest of the year

Inflation reached a 17-year-high of 6.77% last year, its highest level since May 2001 when it reached 6.95%, according to the National Statistics Institute, Inegi.

The figure is well above the Bank of Mexico (Banxico) target level of 3%.

Inegi said the National Consumer Price Index (INPC) showed a monthly increase of 0.59% in December, up from a rise of 0.46% in December 2016.

Inflation spiked at the beginning of the year following a massive fuel price increase. Since then, higher fruit and vegetable prices have been another factor that contributed to the overall increase in inflation.

On average, their cost rose 17.5% last year compared to a 5.4% average annual increase over the previous five years, Guillermo Aboumrad of brokerage firm Finamex said.

The price of tomatoes experienced the biggest hike last month, increasing by 42.9%, followed by zucchini which rose by 26.8%.

At the other extreme, onions, serrano peppers and cucumbers all decreased in price last month.

According to forecasts by 16 banks and economic analysis firms consulted by the news agency Reuters, annualized inflation will remain at around 6.75% until the end of the year.

However, analysts say news of the inflation peak will place additional pressure on Banxico to raise interest rates at its next policy meeting on February 8.

Goldman Sachs economist Alberto Ramos said that a rate hike is “a significant probability” due to the volatility of the Mexican peso, higher than expected inflation and economic uncertainty due to the renegotiation of the North American Free Trade Agreement (NAFTA).

If it does raise its benchmark lending rate a further 0.25 points to 7.5%, it will be the second increase in just three months.

On December 14, the central bank increased the rate from 7 to 7.25%, arguing that it was justified by an inflation rate that was trending upward.

Banxico is targeting inflation of 3% and says that the goal will now be reached at the end of 2018, later than it had previously predicted.

At the start of 2018, central bank Governor Alejandro Díaz de León told the newspaper Milenio that even though a hike in interest rates acts as a disincentive to consumption and investment, adjusting monetary policy helps slow down inflation and therefore leads to greater confidence in the economy as a whole.

“Although in the short term it implies an increase in the cost of finance, we feel that it shields the economy from confronting these shocks . . .” he said.

Source: Milenio (sp), Reuters (en)

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