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Inflation decelerates in Mexico

March 8, 2019

We revised our yearend forecast for 2019 to 3.6%, due to recent downside surprises

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February’s CPI decelerated, with core inflation falling slowly. Inflation fell 0.03% mom in February (compared to the 5yr median of 0.38%), below our forecast (0.04%) and market expectations (-0.02%). The figure was dragged mainly by a fall in non-core food prices, which fell 4.28% mom (from -1.89% a year ago), while energy prices grew 0.83% (from 1.57% a year ago). In contrast, core inflation decelerated slightly, posting a rate of 0.43% mom in February (from 0.49% a year ago). Looking at the breakdown, core services and tradables grew 0.49% (from 0.54% a year ago) and 0.36% (from 0.45% a year ago), respectively.   

At the margin, headline inflation slowed down at a faster pace than core inflation. Using seasonally adjusted three-month annualized figures, headline inflation decelerated sharply to 0.40% rate in February (from 2.73% in January), while core index decelerated at a slower pace (3.04%, from 3.69% in January).

We revised our yearend forecast for 2019 to 3.6%, due to recent downside surprises. Importantly, core inflation, which Banxico’s board is closely monitoring, is falling (although at a slower pace than headline inflation). However, remaining uncertainties over the approval in the U.S. congress of the renegotiated NAFTA and over domestic policy direction continue to be relevant upside risks for inflation.
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Day Ahead: The Statistics Institute (INEGI) will announce December’s gross fixed investment, which we expect to decrease 5.4% yoy (from -3.2% in November).


Falling mining exports along with a moderation of the energy import decline and robust capital imports resulted in a smaller-than-expected trade surplus in February. Overall, a trade surplus of USD 276 million was posted, below the market consensus of USD 750 million and our USD 650 million call (USD 1.1 billion surplus one year earlier). As a result, the rolling 12-month trade surplus dropped to USD 4.3 billion (USD 5.4 billion in 2018, USD 7.9 billion in 2017). However, our seasonally adjusted series shows a USD 4.1 billion (annualized) trade surplus in the quarter ended in February, a mild improvement from USD 3.9 billion in 4Q18 that was hampered by low global copper prices.

As the domestic demand recovery consolidates and growth of trade partners moderates, we expect a mild widening of the current account deficit from the 2.6% of GDP expected for 2018 (1.5% in 2017).
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Wage growth in January was stable at 3.8% yoy, while real wage growth edged up (to 1.6% from 1.2% in December) on the back of lower-than-expected inflation. As a result, in the quarter ending in January, nominal wage growth was 3.9%, broadly stable since 3Q18. Accordingly, real wages in the quarter ticked up 0.1pp to 1.3%, the highest since 2Q18. However, the real wage bill (considering only salaried employment), grew a more moderate 2.1% in the quarter (2.5% in 4Q18 and 3.0% in 3Q18). Complementary sources of information for the labor market (capturing formal employment) that the central bank monitors show rising wage growth. The average income of pension contributors average incomes are growing at a brisk pace (5.6% in 4Q18, 4.8% in 3Q18 and 5.3% in 3Q18), while preliminary data captured by the Labor Ministry (SIL) shows an acceleration in the quarter ending in November. Recovering wage growth, along with low inflation and an expansionary monetary policy would support the consolidation of the consumption recovery.

Consumer sentiment ticked down in February. The GFK consumer confidence index moderated from 47.0 points in January (50 = neutral) to 46.3 points in February, with only two of the five sub-indexes in optimistic territory (down from three in January). This is the seventh consecutive month in pessimistic ground. Consumer sentiment is 4.8 pp below the level reached in February last year with four sub-indexes falling over twelve months. Dragging confidence down in February was the 5-year perspective for the economy at 28.7 points (a sharp drop from 41.2 points one year earlier). Another drag came from the respondent’s current economic situation at 44.1points (despite improving from 42.3 points one year earlier). Meanwhile, the twelve months perspective for the economy remaining positive at 52.6 points, but it dropped notable from 63.7 points in one year. On the plus side, expectations to purchase Household Goods remained firmly in optimistic ground at 57.2 points (moderating only mildly from 59.9 in February last year). Recent labor market data, in addition to wage performance and the slow advance of an ambitious reform agenda, are likely behind subdued confidence in consumers. Going forward we can expect that stable interest rates and controlled inflation can help increase consumer confidence indicators.

Day Ahead: At 8:00 AM, February’s inflation will be released. We expect a growth of 0.1% from January, with the annual inflation remaining stable at a low 1.8%.


Average core inflation recorded the lowest level since October 2014. The central bank published additional inflationary measures for the month February. Tradable good inflation (excluding food and regulated items) moved from 1.03% in January to 0.85%, the lowest rate since early 2013 and the key top headline inflation (3.01%). Meanwhile, non-tradable inflation (also excluding food and regulated prices) inched down to 3.38% (3.87% in January) and regulated inflation fell to 5.65%, from 6.03%. Overall, the average of core inflation measures dropped to 2.81% (from 2.99% in January), dropping below the central bank’s 3% target. Low inflationary pressures and a gradual activity recovery would motivate the central bank board to leave the policy rate unchanged at 4.25% for the time being, starting the gradual tightening cycle in 2H19.


Inflation expectations for 2019 increased once again, according to the latest central bank survey.  Market participants forecast inflation at 31.9% for this year (up from 29% in January) and at 20.3% in 2020 (up from 19.5% in January), and a markedly higher inflation over the next three months, likely in response to January’s negative surprise and the expected hikes in regulated prices. Average monthly headline inflation for the period increased to 3.1%, from 2.5% in the previous survey. Inflation is then expected to drop gradually to 2% mom in July. Expected average monthly core inflation also increased to 2.8% for the quarter ending in April, from 2.2% previously.

Due to persistent inflation, the central bank recently tightened its monetary policy stance. The new monthly target for the monetary base from March through May is zero growth, relative to the actual average level for February. Because the reported monetary base for February was 3% below the target, the new targets leave no room to expand the monetary base and imply higher interest rates in the near term. We agree with the decision, given the deterioration of the inflation outlook and the proximity of the wage-bargaining season, as a more rapid disinflation (from 47.8% last year) is becoming increasingly more challenging. The survey revealed that participants continue to expect the reference rate (Leliq yield) to fall to 37% by December, from 59% at the end of 2018, unchanged from the January survey.

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