Mexico is suffering from an unexpected problem: inflation has accelerated due to a temporary ban on U.S. beef. This is affecting the price of all sorts of everyday items items: even the price of the tacos served from the street carts in Mexico City.

Consumer prices rose 0.6 percent in February, more than double the 0.28 percent rise in February 2003. And Mexico's 12-month inflation rate rose to 4.53 percent in February from 4.2 percent in January.

Meat prices in Mexico have risen from anywhere between 15 and 40 percent since Mexico banned imports of U.S. beef in December after the discovery of a cow infected with mad cow disease in Washington state. In fact Mexico eased the import restrictions last week and in a month or so prices are expected to return to normal.

But........... the story has an unusual twist: the pic-up in inflation, which reverses a slowdown to a record low in 2003, is leading the central bank to consider a second reduction this year in lending in the overnight market in order to boost interest rates, prompting accusations that it is unnecessarily slowing down the economy.

Oscar Badillo has been serving about 500 tacos a day a block from the Mexican Stock Exchange for seven years. Last year his clients could get a spatula scoop of fried beef on two corn tortillas and all the beans, onions, chilies and hot sauce they can cram on top for 6 pesos ($0.55). Now a single taco costs 7 pesos, and many clients aren't content until they've had four.

``Mexico will have to swallow a little bit of inflation,'' said Tim Kearney, senior economist with Bear Stearns & Co. Inc.

Mexico last week eased the ban to allow the import of boneless beef from calves less than 30 months old, while maintaining the restriction on live cattle and any meat detained along the border in the last two months. Still, Badillo says he would lower prices if his meat purveyor lowers costs.

The central bank on February 20 reduced its overnight lending to banks, increasing the so-called daily short in money markets to 29 million pesos a day ($2.64 million) from 25 million pesos -- a move designed to drive up rates and slow inflation.

Patricia Perez-Coutts, who manages $100 million in emerging market stocks in Toronto with AGF Management Limited, says inflation is still much lower as it has been in the past. ``My concern is about the Banco Central policies to raise interest rates,'' she said. ``This could choke the growth of the economy.''

In a four-page explanation of the decision, the bank cited ``temporary shocks'' to supply and ``salary contract settlements during January with an average raise of 4.7 percent.'' In a news conference at the bank's headquarters in Mexico City, Central Bank Governor Guillermo Ortiz suggested he may keep raising rates.

``We have to see how temporary these clashes in supply are; we have to see if there has been any contamination to salary negotiations, for example, which were much higher in January than in December,'' Ortiz said. ``Based on all of this, the Bank of Mexico will make its decision.''
Source: Bloomberg
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