Itaú BBA - MEXICO – Downside surprise in 1H Nov inflation, linked to “El Buen Fin”

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MEXICO – Downside surprise in 1H Nov inflation, linked to “El Buen Fin”

November 24, 2020

Core goods non-food inflation slowed down amid Mexico’s black Friday

Headline and core inflation surprised to the downside. Mexico’s CPI posted a bi-weekly rate of 0.04% (from 0.68% a year ago), below our forecast of 0.33% and market expectations of 0.23% (as per Bloomberg). Likewise, core inflation stood at -0.11% also below our forecast (0.15%) and market expectations of 0.09%. The downside surprise in core inflation is likely associated to an aggressive discount strategy in clothing items during el “Buen Fin” (similar to black Friday; from 9 to 20 of November), while a fall in gasoline prices (mitigated the seasonal removal of the subsidy in electricity tariffs)  and volatile non-core food prices also exerted downward pressure in headline inflation. 

Core inflation slowed down amid Mexico’s black Friday. Headline and core annual inflation decelerated to 3.43% in 1H November (from 4.09% in 2H October) and 3.68% (from 3.96%), respectively. Looking at the breakdown, core goods inflation slowdown to 5.00% (from 5.43%) dragged mainly by core goods non-food inflation (3.07%, from 3.89%), while core food inflation remained persistent (6.82%, from 6.88%). We note that within core goods non-food CPI, clothing items showed the most downward pressure, as shown in our heat map below. Meanwhile, core services annual inflation decelerated further (2.25%, from 2.35%), pressured down by the widening of negative output gap.

At the margin, headline and core inflation also slowed down in November. Assuming bi-weekly inflation in line with the 5-year median variation in the second half of November, the seasonally-adjusted three-month annualized inflation decelerated to 0.94% in November (from 4.11% in October), while core inflation stood at 2.40% (from 3.89%).

The figures highlights downside risks to our 3.9% yearend 2020 inflation forecast.  Our base case is for the central bank to keep the policy rate on hold at 4.25% in the next monetary policy meeting (December 17), but if lower inflation in the short term persists beyond transitory effects, amid a stronger exchange rate, the higher will be the odds of Banxico resuming its easing cycle sooner than we currently expect (1Q21).  

Julio Ruiz

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