In Mexico, at least, they're serious about fighting inflation

The Federal Reserve talks a lot about inflation.

The Bank of Mexico does something about it.

The Mexican central bank today surprised markets by raising its benchmark short-term interest rate to 7.75% from 7.5%, the first increase since October.

The bank said it tightened credit because "the recent inflation dynamic is worrying."

Like most of the world, Mexico is battling rising cost pressures, particularly in food products.The country’s consumer price index rose 4.95% in the 12 months through May, well above the central bank’s target range of 2% to 4%, notes Nick Bennenbroek, head of currency strategy at Wells Fargo & Co.

Still, the bank’s move was unexpected because the government on Wednesday announced a deal with major food companies to freeze prices on more than 150 pantry items through the end of the year, in an attempt to ease the squeeze on consumers.

That was supposed to forestall an interest-rate hike. Instead, it looks like the Mexicans are taking the inflation battle seriously enough to risk slowing their economy with higher interest rates.

In the currency markets, at least, the Bank of Mexico’s decision is a hit. The peso has edged up to a five-year high against the dollar. The buck is worth 10.27 pesos this morning, down from 10.32 on Thursday and 10.36 a week ago. That’s not a big move, but it’s the trend that counts.

Interestingly, the Mexican stock market is suffering less today than the U.S. market. The Mexican IPC index was down about 0.6% at 10:45 a.m. PDT, compared with a 1.6% drop in the Dow industrials.

The U.S. inflation rate -- 4.2% for the year through May -- isn’t much lower than Mexico’s. But when Fed policymakers meet next Wednesday, they’re almost certain to leave their key rate at 2%, despite the recent barrage of rhetoric about being inflation-vigilant.

Given this week’s renewed carnage in bank and brokerage stocks on Wall Street, it’s clear the Fed is boxed in: Tighter credit could be a certain death sentence for many financial companies that are teetering on the edge.

Photo: Guillermo Perea/EPA