Itaú BBA - MEXICO – CPI was below market expectations, with core inflation gradually decelerating

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MEXICO – CPI was below market expectations, with core inflation gradually decelerating

March 22, 2019

Annual inflation continues within the range around central bank’s target

CPI was below market expectations, with core inflation slowing. Mexico’s CPI posted a bi-weekly rate of 0.26% in the first half of March (from 0.29% a year ago), below our forecast of 0.29% and median market expectations (as per Bloomberg). Importantly, core CPI posted a bi-weekly rate of 0.18% (from 0.24% a year ago and below the 5 year median print of 0.24%). Core inflation was dragged by services inflation (0.17%, from 0.31% a year ago), while tradables inflation accelerated somewhat (0.19%, from 0.15% a year ago). In turn, non-core inflation was driven mainly by energy prices (1.08%, from 0.55% from a year ago), reflecting the recent increase in gasoline prices (despite the Ministry of Financ e fiscal stimulus for gasoline prices implemented during the past two weeks).  

Headline inflation decelerated on an annual basis, with non-core services prices slowing significantly. On an annual basis, inflation was 3.95% in the 1H of March (from 3.99% in the 2H of February), continuing below the upper bound of the range around central bank’s target, with core CPI decreasing to 3.51% (from 3.57%). Within the core index, services inflation decelerated significantly to 3.31% (from 3.46%), while tradables inflation accelerated somewhat to 3.68% (from 3.63%). In turn, non-core inflation remained practically unchanged at 5.40% year-over-year in the 1H of March (compared to the 2H of February), with energy inflation accelerating somewhat to 7.94% (from 7.38%), mainly associated to gasoline. In turn, non-core food inf lation d ecelerated to 3.80% (from 4.31%).

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 March, we estimate that seasonally-adjusted three-month annualized inflation stood at 0.20% in March (from 0.38% in February) for the CPI and 2.56% (from 3.00% in February) for the core index. The diffusion index, which tracks the percentage of items in the CPI basket with annual inflation higher or equal to four, was 45.66% in the 1H of March, up from 43.40% in the 2H of Feb but down from 50.18% by yearend 2018.

We expect inflation to end 2019 at 3.6%. Importantly, core inflation, which Banxico’s board is closely monitoring, is gradually falling, with core services inflation decelerating significantly. However, the uncertainties that Mexico’s economy still faces continue to constitute upside risks for inflation. In this context, the central bank is likely to remain on-hold next week. However, should these uncertainties dissipate, below-potential growth combined with falling inflation will likely allow for interest rate cuts before yearend (we expect two 25-bp rate cuts in 4Q19).

Julio Ruiz



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