Itaú BBA - MEXICO - Inflation accelerated in April, with some evidence of second-round effects

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MEXICO - Inflation accelerated in April, with some evidence of second-round effects

May 9, 2017

Services inflation and diffusion indexes hint at second-round effects

Mexico’s inflation came in high in April, pressured by the lagged effects of peso depreciation and a rebound of agricultural prices. The CPI increased by 0.12% month-over-month, above market expectations (0.06%, as per Bloomberg) and our own forecast (0%). Monthly inflation is normally negative in April (the five-year median is -0.33% month-over-month), as the Federal Electricity Commission (CFE) introduces “summer tariffs”, which are lifted later in the year (October-November). In fact, electricity prices decreased by 13.4%, subtracting 34bps from monthly CPI inflation. However, this was more than offset by the increase of core goods (tradable) prices (up by 0.6%), a sharp rebound of agricultural prices (up by 1.9%), and the seasonality of the Easter holidays (which exerted upward pressure on service prices, such as air transport, tourism services, and food outside home).

Annual inflation continued rising, driven by tradables, services, and agricultural inflation. Annual headline inflation increased to 5.82% year-over-year (from 5.35% in March) further above the Central Bank’s target. Core inflation also increased, to 4.72% (from 4.48%) during the same period. Both core goods (6.05%, up from 5.85%) and core services (3.59%, up from 3.32%) showed an increase. The former is running high, reflecting the sharp exchange rate depreciation observed until mid-January, and the latter is more moderate but showing an upward trend. On the non-core side (9.25%, 8.02% previously), the increase was explained by the volatility of agricultural inflation (4.36%, 1.02% previously). Inflation for energy and regulated items decreased (12.44%, 12.56% previously) but remains at high levels since January, when gasoline prices shot up due to the “gasolinazo”.

The rise of services inflation and diffusion indexes suggest that second-round effects are materializing. We note that excluding telecom prices and FX-sensitive services (airfares, tourism, hotels), annual services inflation is also higher than it was during the past year, although it has increased by much less than the full index and it has stabilized at around 3.7% since February. Moreover, a diffusion index, which tracks the percentage of items in the CPI basket with annual inflation higher or equal to 4%, continues to increase (73% in April, up from 51% in December 2016).

We have increased our inflation forecast for 2017 to 5.4% (from 5%). In our baseline scenario, inflation would move down because of the lagged effects of peso appreciation (7% year-to-date, compared to the 19% depreciation observed in 2016) and, to a lesser extent, weaker activity. Tighter monetary policy will also be instrumental to contain inflation expectations. So far, inflation expectations have been increasing significantly for the short-term, but longer-term measures have recently stabilized.


Alexander Müller 



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