Itaú BBA - MEXICO – Annual inflation decelerated in the 1H of November

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MEXICO – Annual inflation decelerated in the 1H of November

November 22, 2018

Core and non-core inflation slowed down on an annual basis

Inflation came in below market expectations in the first half of November. Mexico’s CPI posted a bi-weekly rate of 0.61% in the first half of November, below our forecast (0.75%) and median market expectations (0.67%, as per Bloomberg). Within the index, core prices increased 0.19% in the first half of November, with core goods and services posting a bi-weekly growth rate of 0.24% and 0.14%, respectively. On the other hand, non-core index posted a bi-weekly growth rate of 1.89% in the first half of November, with food prices growing 1.40% and energy prices gaining 3.1% (reflecting the removal of the seasonal subsidy in power utility tariffs implemented during the summer), in the same period. We note that the bi-weekly inflation print for the first half of November was 14 bps below its 10-year median variation.

Headline inflation fell on an annual basis, with both core and non-core prices slowing down. On an annual basis, headline inflation decelerated to 4.56% year-over-year in the first half of November (from 4.87% in the 2H of October). Core inflation also decelerated somewhat, posting a growth rate of 3.63% (from 3.72%), with both core goods (3.87%, from 3.96%) and core services (3.39%, from 3.49%) slowing down. Likewise, non-core CPI decelerated to 7.46% year-over-year (from 8.42% in the 2H of October). Inside the non-core index, food inflation reached 2.93% (from 2.60%), while energy and regulated tariffs index decelerated to 10.58% (from 12.35%). On an annual basis, the deceleration in energy prices (13.69% in the 1H of November, from 16.65%) was driven by a deceleration in Gas LP prices (7.2%, from 15.60%) and power utility tariffs (0.84%, from 1.90%), while gasoline prices decelerated mildly (22.11%, from 22.69%).

At the margin, headline inflation decelerated, while core inflation remained practically unchanged. Assuming bi-weekly inflation in line with the 10-year median variation in the second half of November, we estimate that seasonally-adjusted three-month annualized inflation posted 3.86% in November (from 4.93% in October) for the CPI and 3.94% (from 3.93% in October) for the core index. Core inflation continues inside Banxico’s target range, while headline inflation moved inside the target range, but both close to the upper bound. Moreover, the diffusion index, which tracks the percentage of items in the CPI basket with annual inflation higher or equal to four, fell to 48.30% in the first half of November (from 49.05% in the 2H of October).

We expect inflation to reach 4.4% for the end of this year. The most recent inflation figure reduces pressure on Banxico to hike rates in the next monetary decision. However, upside risks to inflation increased substantially, due to a depreciation of the currency. Besides monetary policy tightening in the U.S. and remaining uncertainties over the approval in the U.S. congress of the renegotiated NAFTA, the uncertainty over domestic policy direction is putting pressure on the currency. On the other hand, the recent decline in oil prices if sustained can reduce inflation faster than we currently expect.  

Julio Ruiz

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