Bank of America Sees More Inflation in Mexico

ERIC MARTIN Bloomberg News, writes, "With Mexico's inflation rate plummeting to an almost 50-year low in October, bond traders have naturally set about slashing their cost-of-living expectations.

"To Bank of America Corp.'s Carlos Capistran, they've got it all wrong.

"The pace of consumer-price increases is poised to accelerate as growth picks up in Latin America's second-biggest economy and a weak peso drives up the cost of some imports, said Capistran, the most-accurate inflation forecaster among 23 economists surveyed by Bloomberg."

Either your numbers for inflation in Mexico are understated, as they are in the U.S. or something else is going on. The peso over the last seven years is down from 10 pesos to the dollar to almost seventeen to the dollar. Yet there is little inflation. Or the measurement of inflation is wrong and goods in Mexico have moved up sharply in the last seven years.

"He expects the rate to rise to 3.5 percent next year and 3.2 percent in 2017. That's well above the 2.6 percent inflation implied by a bond-market gauge known as the breakeven rate.The inflation expectations implied in the market in the short term are too low, possibly as a reaction of realized inflation so far this year," Capistran said from Mexico City. "Risks for inflation are tilted toward the upside." The inflation rate fell to 2.48 percent in October, the lowest since 1968, as sluggish growth, falling phone-service costs and lower gasoline-price increases outweighed the impact of the currency's 12 percent tumble this year.

"That's not likely to be the case next year as Mexico moves beyond the immediate impact of some legal changes, such as the end of connection fees for long-distance phone calls, Capistran said."

Mexico it seems to me is experiencing the same deflationary pressures as the rest of the world.

Also, some importers who buy products in dollars may raise prices after exhausting inventories that they bought when the peso was stronger, he said.

Bank of America recommends buying inflation-linked bonds due in 2046 and selling similar-maturity fixed-rate notes.

Yields on the linkers have plunged to a record low, leaving the difference with the fixed securities at 2.92 percentage points. That's too low, said Bank of America strategist Ezequiel Aguirre.

Mexico's economy will expand 2.5 percent in 2016, up from 2.3 percent this year, Capistran said.

The U.S. is on the brink of recession and will Mexico experience higher growth as the world's economy slides into the abyss?

He's not alone in predicting a spike in inflation. Bank of Nova Scotia's Mario Correa forecasts the pace of consumer price increases will accelerate to 4.6 percent in 2016 as the peso's weakness feeds through into the cost of living.

That's the highest rate forecast in a Bloomberg survey of 23 economists and would exceed the upper end of the central bank's inflation target range of 2 percent to 4 percent.

While Correa acknowledges that the peso's impact on consumer prices has weakened, he said it's still a factor.

Each 1 percent decline in the peso's value today fuels less than 0.05 percent of inflation, compared with about 0.5 percent 20 years ago, according to Bank of America.

"The currency pass through isn't dead, though it's less than in the past," Correa said from Mexico City. "Once people realize this exchange rate move is something more permanent, we're likely to see more of an impact on prices."

I'm not a big fan of experts who project today's trend into the future.

BNP Tells Traders to Exploit El Nino With Mexico Inflation Wager

Brendan Case at BloombergBusiness writes, "With Mexico’s inflation rate sinking to a nine-year low this month, bond traders are naturally showing scant concern consumer prices will pick up any time soon.

That’s a mistake to BNP Paribas SA. It’s predicting El Nino -- a global weather pattern that typically causes droughts, wildfires and floods -- will reverse a slide in agricultural prices and boost the inflation rate in as little as six months. The Paris-based bank recommends investors bet on cost-of-living expectations rising in the bond market.

BNP has history on its side as past El Nino episodes have pushed up global food prices and fueled the biggest inflation surges in Mexico and Brazil, according to a paper last month by researchers at the International Monetary Fund and the University of Cambridge. An increase in the cost of food, which accounts for more than 20 percent of Mexico’s consumer price index, would help push up annual inflation from 2.93 percent in the first half of May.

“El Nino will be a fundamental factor, as this will represent an exogenous shock to the Mexican market,” BNP fixed-income strategists Gabriel Gersztein and Gustavo Mendonca said in an e-mail. “The Mexican market is not isolated from the rest of the world, so a rise in agricultural prices will naturally impact food prices in Mexico, leading markets to price in this effect.” For the rest of the article see http://www.bloomberg.com/news/articles/2015-05-27/bnp-tells-traders-to-exploit-el-nino-with-mexico-inflation-wager