Inflation dropping.  Inflation continues its downward trend despite the strong economic expansion.  In May, consumer prices increased 0.37% over April, the lowest monthly rate in the last 28 years.  Consequently, the annual inflation rate dropped from 9.7% to 9.5%, the lowest rate since January 1995.  Panellists anticipate that inflation will drop to 9.1% by year-end and recede a further percent the following year.  The Central Bank has not yet adjusted to lower inflationary environment and continues to maintain its objective to drive down inflation to single digit levels.  According to the Central Bank the main upside risks for inflation are of external nature and would affect consumer prices mainly via the exchange rate.  Particularly, a steep decline in the oil price, a significant deceleration in the pace of US economic growth and a major interest rate hike in the US could prompt a weakening of the exchange rate and thus exert pressures on the level of domestic prices.

Peso weakens on upcoming elections.  The peso weakened substantially as market players took up positions in US$ amid increasing uncertainty over the outcome of the 2 July presidential and congressional elections.  On 9 June the benchmark 48-hour peso contract stood at 9.9 pesos per US$, off 50.3 centavos since end April (39.0 centavos since end May).  Panellists expect the peso to weaken to 9.9 pesos per US$ at year-end, after the 9.8 forecast last month.

Fox scores points again in debate.  According to polls, the candidate of the right-center National Action Party (PAN, Partido Acción Nacional) and the Green Party (PVEM, Partido Verde Ecologista), Vicente Fox, won the second televised debate in late May, the last before the 2 July election.  Of those who saw the debate and who were interviewed over the weekend by the newspaper Reforma, 36% said Fox had won, compared to 20% for Francisco Labastida, the candidate of governing Party of Institutional Revolution (PRI, Partido Revolucionario Institucional).  Leftist opposition candidate Cuauhtemoc Cardenas was considered the winner of the exchange by 18% of those individuals surveyed.  The latest survey, an independent ACNielsen poll conducted for the newspaper Milenio in late May, showed Labastida leading with 42.9%, trailed by Fox with 35.8% and Cardenas with 17.4%. 

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