Itaú BBA - MEXICO – Inflation accelerated in July

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MEXICO – Inflation accelerated in July

August 7, 2020

Core goods CPI continues to grow above Banxico’s target of 3%

CPI in July was broadly in line with market expectations. Consumer prices grew 0.66% month-over-month in July (from 0.38% a year ago), slightly below our forecast of 0.70% and close to market expectations of 0.65% (as per Bloomberg). In turn, core inflation was in line with our forecast and market expectations of 0.40%. We note that core inflation continues to be pressured by core good prices, which gained 0.64% (from 0.15% a year ago and  5-year median of 0.12%).   

Core goods CPI and energy prices were the main upside pressures to the headline figure. Annual headline and core inflation accelerated to 3.62% in July (from 3.33% in June) and 3.85% (from 3.71%), respectively. Within core inflation, prices for goods continue to increase at a strong pace (5.19% year-over-year in July, from 4.69%). Persistence in core goods inflation is associated to supply/demand shocks amid the outbreak. On the benign side, services inflation decelerated further to 2.40% in July (from 2.65% in June), reflecting downward pressure from the widening of the negative output gap. Finally, non-core CPI (2.92% year-over-year in July, from 2.16% in June) was pressured by an upturn in energy prices (-0.41%, from -4.57%).

At the margin, headline and core inflation also accelerated. Using seasonally adjusted three-month annualized figures, the CPI accelerated to 9.16% in July (from 4.40% in June), while core CPI stood at 5.05% (from 4.55%).

We expect inflation at 3.7% for year-end 2020 pressured by the persistence in core goods inflation. While our base scenario is for Banxico to cut its policy rate in 50-bps in the next monetary policy meeting (August 13), the central bank may opt to slowdown the easing pace in the subsequent meetings amid the upturn in inflation. Still, we expect lower inflation looking forward (3.2% for the end of 2021) driven by the widening of the negative output gap and appreciation of the currency.

Julio Ruiz


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