MEXICO CITY – Mexico's rate of inflation jumped in May to its fastest pace since late 2004 on rising food prices, putting pressure on the central bank to raise borrowing costs despite a slowing economy.

Consumer prices rose 4.95 percent in the 12 months through May, the central bank said Monday. The annual inflation rate was 4.55 percent in April.

Investors responded to the data by increasing bets that the central bank could raise interest rates this year, pushing up yields on interest rate futures and bonds.

“This strengthens the case ... for a hike,” said Benito Berber, an economist at RBS Greenwich Capital.

Berber and other analysts, however, stressed that inflation is still within the central bank's forecast range, which means the bank might be comfortable for now leaving the overnight interest rate at 7.50 percent.

“If the numbers are within the central bank's expectations, I think that the bank can leave policy on hold,” said Alonso Cervera, head of emerging markets research at Credit Suisse.

Mexico's central bank expects average inflation will be as high as 5 percent during the second and third quarters of this year. The central bank has held interest rates steady since October.

FOOD PROBLEM

Inflation across Latin America has jumped this year, driven by higher demand for grains in fast-growing countries such as China and by the rise of the biofuel industry.

In Mexico, higher prices for staple foods such as rice and corn tortillas helped drive the jump in the annual inflation rate in May.

Analysts said prices in the service sector, which in May rose at twice the rate they did in April, were worrisome because they could mean that inflation was more than a food problem.

“There are some early signals it is spreading,” said Juan Trevino, an economist with the bank HSBC in Mexico City.

At the same time, Mexico's economy is slowing as growth in the United States, its top trading partner, falters. The government says the economy grew at a 3.7 percent clip during the first quarter when taking into account a week-long holiday, down from 4.2 percent the previous quarter.

Consumer prices actually fell 0.11 percent in May, helped by subsidies for electricity and cooking gas. But the annual reading still increased because prices had fallen much more the previous year.

The drop in the May reading was less than the 0.17 percent fall expected by analysts in a Reuters poll.

Closely watched core inflation, which strips out some volatile food and energy prices, was 0.50 percent during the month. Annual core inflation was 4.86 percent, up from 4.56 in April.

(Editing by Tom Hals)