Bloomberg: It's Not Deflation, But Mexico's CPI Drop Upends Traders Eric Martin - Bloomberg
go to original January 28, 2015

The specter of deflation may not be stalking Mexico like it is Europe, but the unexpected drop in consumer prices this month is proving no less unsettling.

A week ago, swaps traders were certain that interest rates in Mexico were headed higher this year. Now, they’re pegging those chances at just 39 percent after a report on Jan. 22 showed that living costs actually fell to start a year for the first time on record.

The reversal comes as slowing global growth and plunging commodity prices prompt central banks from Europe to Japan to step up stimulus measures to prevent a slump in prices from morphing into outright deflation. With the tumble in oil prices limiting Mexico’s ability to revive its sputtering economy, odds are growing the central bank will instead cut rates from a record low 3 percent, says Capital Economics Ltd.

“There’s an air of deflation in the world economy,” David Rees, an emerging-market economist at London-based Capital Economics, said by telephone. “That could certainly help sway the sentiment of policy makers in Mexico. Economic activity still isn’t living up to expectations.”

He predicted the Bank of Mexico will trim borrowing costs by a quarter point at its rate-setting meeting Thursday.

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