Itaú BBA - MEXICO – Annual inflation falls within the range around central bank’s target

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MEXICO – Annual inflation falls within the range around central bank’s target

February 22, 2019

Non-core food items was the main downward pressure for the CPI

CPI was significantly below market expectations, dragged mainly by non-core food index. Mexico’s CPI posted a bi-weekly rate of -0.10% in the first half of February (from 0.21% a year ago), below our forecast (0.01%) and median market expectations (0.04%, as per Bloomberg). Non-core CPI fell 1.15% (from -0.06%), with food items decreasing 2.78% (from -1.25% a year ago), while energy prices decreased 0.01% (from 0.86%). In turn, core items grew 0.26% (from 0.30%), with services and tradables posting bi-weekly growth rates of 0.17% (from 0.23% a year ago) and 0.34% (from 0.37%), respectively. 

Headline inflation fell on an annual basis, with non-core prices slowing down at a faster pace than core prices. On an annual basis, CPI increased 3.89% year-over-year in the 1H of February (from 4.21% in the 2H of January), breaching the upper bound of the range around central bank’s target (4.0%), with core CPI decelerating slightly, to 3.51% (from 3.55%). Within the core index, tradables and services decelerated somewhat, to 3.59% (from 3.64%) and 3.40% (from 3.46%), respectively. In turn, non-core CPI decelerated to 5.15 year-over-year (from 6.31% in the 2H of January), with non-core food index decelerating to 5.28% (from 6.94%), while energy prices keeps slowing down (mainly associated to lower gasoline prices) to 5.76% (from 6.69%). Within energy prices, regular gasoline prices slowed to 9.29% (from 11.84% previously).

At the margin, headline and core inflation decelerated sharply. Assuming bi-weekly inflation in line with the 10-year median variation in the second half of February, we estimate that seasonally-adjusted three-month annualized inflation posted 0.31% in February (from 2.73% in January) for the CPI and 2.88% (from 3.65% in January) for the core index. 

We expect inflation to reach 3.8% for the end of this year. Importantly, core inflation, which Banxico’s board is closely monitoring, is gradually falling. While the recent CPI numbers suggest downside risks for our inflation forecast, we note that remaining uncertainties over the approval in the U.S. congress of the renegotiated NAFTA and over domestic policy direction, at a time that the economy is operating with no slack, continue to be relevant upside risks for inflation.  

Julio Ruiz

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