Written by John Benjamin from Orbex

Mexico’s inflation is likely to be boosted higher as the government announced that it would be hiking fuel prices by nearly one-fifth from January. The government said that fuel price ceilings will be capped between 14.2% – 20% above December’s prices.

The announcement has boosted economists’ expectations on the 2017 inflation forecasts for Mexico which is likely to put pressure on the Mexican central bank which has been frequently hiking interest rates in an effort to curb inflation while battling the weaker exchange rate. The Mexican peso has been in a free fall since the U.S. presidential election campaigns with the declines seen accelerating since the November election results which saw the Republican candidate Donald Trump emerge victorious.

The Mexican central bank hiked interest rates for a fifth time in 2016 after inflation started to steady above the 3% inflation target rate from the central bank which has also increased on a weaker exchange rate. In the first half of December, Mexico’s inflation accelerated to 3.34% rising at the fastest pace in nearly two years.

Mexico Inflation Rate

Mexico Inflation Rate: 3.315
Following the announcement on fuel price hikes, regional banks in Mexico have upgraded their forecasts for inflation in 2017. Banorte raised inflation outlook to 4.7%, up from 4.3% while Finamex, a brokerage firm expected a boost of nearly 0.8% to the consumer price index in January compared to a month ago. Finamex said that there are enormous challenges for the Mexican central bank’s policies in 2017. The central bank hiked interest rates to 5.75% in 2016 which was the highest rate seen since April 2009.
The government’s announcement was met with some resistance as various industry associations expressed concerns that higher fuel prices could add more headwinds to local businesses. The markets will also be looking at oil prices as the November OPEC decision to cut production comes into effect. Oil prices have been pushing higher ever since.