MEXICO CITY – Mexican annual inflation rose in July to 5.39 percent, its highest in over three years, making it likely the central bank will hike interest rates again soon.

Consumer prices rose 0.56 percent in July, the central bank said on Thursday, as high food costs and more expensive fuel and public transport weighed on households.

Core inflation, which strips out some volatile food and energy prices, was 0.40 percent during the month.

Mexico's central bank has raised its key interest rate twice since June, to 8 percent, to fight inflation running at its highest since 2004, due mostly to high global food prices.

Many analysts expect the bank to further tighten borrowing costs at its next monetary policy announcement next week.

Inflation across Latin America has jumped this year, driven by higher demand for grains in fast-developing countries like China and by the expansion of the biofuel industry.

The central bank said government-set prices for energy and energy-related services – such as gasoline, electricity and public transportation – also fueled the rise.

Economists in a Reuters poll on average had predicted consumer prices rose 0.51 percent in July and that core inflation was 0.39 percent.

In June, consumer prices rose 0.41 percent and annual inflation was 5.26 percent. Annual inflation in the first half of July was 5.37 percent.

The government has been quickening the pace of gasoline price increases since April despite massive subsidies aimed at shielding consumers from rising international oil prices. Mexico imports about 40 percent of its gasoline, despite being a major crude oil exporter.

“Today's data confirms that inflation in Mexico is broad-based and that risks of second-round effects are high,” TD economist Bartosz Pawlowski said in a note to clients.

The central bank warned last week that inflation will be much higher over the next two years than previously forecast.

The bank said average quarterly inflation could be as high as 6 percent during the last three months of this year as a recent spike in global commodities costs gradually feeds into prices for products on grocery store shelves.

“Because of the recent deterioration of expectations and because sub-indices other than food are under pressure, we expect the Banco de Mexico to raise its overnight rate by 25 basis points on Aug. 15,” Ixe brokerage said in a note.

Interest rate futures (0{PI:87}TII:) were down slightly after the data was released but still suggested investors see the central bank raising rates by as much as 75 basis points by October.

There are 100 basis points in a percentage point.

The Banco de Mexico had previously predicted inflation could slow toward its 3.0 percent target in 2009, but now does not see inflation approaching that target until 2010.

(Reporting by Noel Randewich; Editing by James Dalgleish)