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By most traditional economic gauges, little is going right today for Mexico. Growth is sluggish, oil exports are falling and credit markets have started to dry up.

Yet beneath the surface, a surprising and little-understood transformation is ushering in one of the country’s most important developments in years: the peso’s age-old link with inflation has been broken. No longer does a plunge in its value trigger an automatic surge in consumer prices. In fact, the most recent data suggest that it causes almost no inflation at all.

It may seem like an obscure, wonky topic -- "pass-through" is the term used by analysts -- but it’s hard to underestimate the significance in an emerging-market nation like Mexico that’s trying to climb into the ranks of the world’s developed economies. First, it protects the purchasing power of consumers in a country where about half the population lives below the poverty line. What’s more, it gives central bankers the kind of policy flexibility they never had before. Without having to worry about inflation, they can avoid the classic trap that afflicts so many developing nations: having to raise interest rates and choke off economic growth every time financial turmoil causes a selloff in the currency.

It’s a transformation that Mexico’s top officials began touting over a year ago. Economists and investors, though, were skeptical. As Credit Suisse Group AG’s Alonso Cervera says, "we had to see it to believe it." Now they have. Over the past 12 months, as the peso plunged 17 percent against the dollar, Mexico’s annual inflation rate fell to a record-low 2.3 percent from 4.2 percent. Bank of America Corp. says the currency’s impact today is almost imperceptible, with each 1 percent decline in its value fueling less than 0.05 percent of inflation. Two decades ago -- when consumer prices soared over 20 percent in just four months after the government devalued the exchange rate -- the peso-to-inflation ratio was 10 times higher, the bank estimates.

"They slayed the inflation dragon," said Goldman Sachs Group Inc.’s Alberto Ramos.

Theories abound as to what’s behind the shift. Many of them lean toward the ethereal and conceptual: It’s the result of Mexico’s hard-won inflation credibility over the past two decades; or because the country doesn’t target an exchange-rate level, allowing the peso to move freely in both directions; or because the central bank was given its independence from the government.

Others are a bit more tangible: greater competition in the retail industry is making it harder for companies to pass the higher cost of imports onto consumers; the country’s sluggish consumer demand, and weak overall economic expansion, are accentuating that trend. Gross domestic product has grown at an annual clip of less than 3 percent this year, not even half the long-term goal that President Enrique Pena Nieto set when he pushed through legislation to open up the energy and telecom industries.

That last point, of course, would be more of a negative than a positive, a reflection in part of the sluggish growth and almost non-existent inflation plaguing much of the developed world. But if higher inflation has become something that policy makers are trying to foster nowadays in the U.S., Europe and Japan as part of their pro-growth strategies, fighting inflation remains the focus throughout much of emerging markets. Just look at Mexico’s neighbors. Brazil has raised interest rates 16 times in the past 2 1/2 years in a futile bid to shore up the currency and curb an inflation rate that’s topped 10 percent. And in Colombia, where the peso’s dropped 30 percent, the central bank has boosted borrowing costs seven times since last year.

Mexico, by contrast, has held its benchmark rate at a record-low 3 percent since last year. Policy makers are quick to highlight the feat. The central bank released a study this month showing Mexico has the lowest pass-through ratio among major Latin American countries. And in an August op-ed piece in Reforma newspaper, central bank Governor Agustin Carstens declared that the peso-inflation link is, by and large, dead. (Weeks later, the peso touched a record low of 17.3 per dollar, the result in part of declining international prices for the country’s oil exports.)

While this marks a milestone for Mexico, "it’s not the moment also to do a victory lap," said Ramos, the Goldman economist. If the expansion is more robust the next time the currency sinks, inflation could react differently, he warned.

Luis Jorge Turati has had an up-close view of the peso’s transformation over the years.

His family has owned eyeglass shops in Mexico City for almost 100 years. Back in the 1980s and ’90s, Turati remembers raising prices on the frames he imported following devaluations. Now, he says, shoppers will turn elsewhere if he lifts prices. "Basically we’re absorbing it," he says, after reeling off a litany of possible factors driving consumers’ new behavior. One on his explanations went roughly like this: After years of living in a low inflation environment, Mexicans can more easily spot price increases and, as a result, are more likely to balk at forking over the extra cash.

That’s actually something of a classic textbook argument. And it’s an idea that the central bank touched on too in this month’s inflation study. Add it to the list of theories dedicated to the end of pass-through in Mexico.

— With assistance by Sebastian Boyd, Ye Xie, Ralph Cope, and Brendan Case

( Adds latest inflation figure in fourth paragraph. )