Itaú BBA - MEXICO – Inflation advanced further in October

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MEXICO – Inflation advanced further in October

November 9, 2020

We now expect inflation at 3.9% for yearend 2020

Headline monthly inflation was above market expectations in October. Consumer prices increased 0.61% month-over-month in October (from 0.54% a year ago), close to our forecast of 0.62% and above market expectations (0.57%, as per Bloomberg). In turn, core inflation stood at 0.24%, below our forecast and market expectations of 0.26%. Upside pressure in headline inflation came mainly from the removal of the seasonal subsidy to electricity tariffs and non-core agricultural prices.

Headline annual inflation accelerated in October. Annual headline inflation stood at 4.09% in October (from 4.01% in September), while core inflation remained practically unchanged at 3.98% (from 3.99%). Within core inflation, core goods inflation (5.44%, from 5.40%) continues to be the main driver, while core services inflation (2.40%, from 2.45%) remains subdued, reflecting the wide output gap. In this line, our heat map of core annual inflation (below) shows most food CPI items continue to grow above their 5-year historical mean, while several services items show important downside pressure.

At the margin, headline and core inflation decelerated, but continue at high levels. Using seasonally adjusted three-month annualized figures, the CPI stood at 4.25% in October (from 5.02% in September), while core CPI stood at 4.05% (from 4.63%).

We now expect inflation at 3.9% for yearend 2020. While high (and higher-than-expected) inflation figures support our call of Banxico keeping the policy rate on hold next Thursday (at 4.25%), the recent significant appreciation of the peso highlights the risk of Banxico cutting the policy rate once more (by 25-bps) before pausing the easing cycle. 

Julio Ruiz

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