Itaú BBA - MEXICO – Above target inflation in September

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MEXICO – Above target inflation in September

October 8, 2020

Core goods inflation remained persistent

Headline monthly inflation was slightly below market expectations in September. Consumer prices increased 0.23% month-over-month in September (from 0.26% a year ago), below our forecast of 0.27% and market expectations (as per Bloomberg). In turn, core inflation stood at 0.32%, broadly in line with our forecast of 0.31% and market expectations. The downside surprise in headline inflation came mainly from non-core agro items (with no growth) and energy prices (-0.33%).

Core goods inflation remained persistent in September. Annual headline and core inflation stood at 4.01% in September (from 4.05% August) and 3.99% (from 3.97%), respectively. Within core inflation, core goods inflation (5.40%, from 5.36%) stood above the upper limit of the central bank target, with the 2H of September inflation accelerating slightly further (5.44%, from 5.36% in the 1H of September).  Meanwhile, core services inflation remained subdued at 2.45% in September (from 2.46% in August), reflecting the wide negative output gap.  

At the margin, headline and core inflation decelerated, but continue at high levels. Using seasonally adjusted three-month annualized figures, the CPI stood at 5.12% in September (from 6.61% in August), while core CPI stood at 4.70% (from 5.02%).

We expect inflation at 3.8% for yearend 2020, driven mainly by upward pressure from core goods inflation due to supply/demand shocks amid the outbreak. Persistent inflation reduces the room for Banxico to cut further the policy rate for now, in our view.  We expect Banxico to remain on hold for the rest of the year with the policy rate at 4.25%. 

Julio Ruiz

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