High Mexican Inflation Poses Challenge for New Banxico Chief

(Bloomberg) -- Mexico's inflation provided little relief for the new central bank governor in December, remaining more than double the bank's target as it slowed a fraction from November.

Consumer prices rose 7.36% from a year earlier, compared with the 7.45% median estimate of economists surveyed by Bloomberg and just below November's 7.37% print. On a monthly basis, prices rose 0.36%, compared with a 0.46% forecast. The central bank, known as Banxico, targets inflation of 3%, plus or minus one percentage point.

In less positive news, core annual inflation accelerated to its fastest pace in two decades, at 5.94% from 5.67% in November. The figure, which excludes volatile items like fuel, is closely watched by policy makers in Mexico.

“It's not good news that core keeps going upwards,” Deputy Banxico Governor Jonathan Heath tweeted after the results were published. The data are a sign of inertia and “even a structural” problem, he wrote.

The central bank sped up the pace of monetary tightening in December to rein in inflation expectations, delivering a half-point hike that took the overnight rate to 5.5%. Outgoing Governor Alejandro Diaz de Leon said the bank isn't committed to further half-point increases in the future.

“For Banxico, the scenario has not changed. And in a sense it's worse because core inflation keeps increasing,” said Carlos Capistran, chief economist for Mexico and Canada at Bank of America Corp, who expects policy makers to hike by a half point again in February.

Accelerating core inflation suggests that price shocks are now passing through from volatile goods to ones that are normally more stable, said Pamela Diaz Loubet, an economist at BNP Paribas. “It reflects a lower resilience to absorb shocks,” she said, noting that a large bump in the minimum wage will likely spur inflation in January.

Adding uncertainty to future monetary policy decisions is the new central bank governor picked by President Andres Manuel Lopez Obrador after he retracted his previous nominee. Victoria Rodriguez Ceja who replaced Diaz de Leon at the start of 2022, has a long history of public service, but little monetary policy experience.

Read More: Mexico Traders Keep Faith in Rate Hikes as AMLO Asks for Growth