Itaú BBA - MEXICO – Inflation falls at the margin in June

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MEXICO – Inflation falls at the margin in June

July 7, 2017

The fall of inflation at the margin is led by core goods (tradables)

Mexico’s inflation continued increasing in June, pressured by the volatile non-core prices, but inflation fell at the margin. The CPI posted a 0.25% monthly variation in June, in between our forecast (0.20%) and median market expectations (0.27%, as per Bloomberg). Agricultural prices, which usually drop in 2Q17 because of seasonality, increased by 0.42% month-over-month, exceeding its 5-year median variation (-2.12%) by six times. Core goods and core services prices advanced 0.32% and 0.29%, respectively, contributing 11-bps and 12-bps to the monthly print. Conversely, the drop of gasoline prices (-0.6%) exerted downward pressure. We note that on June 15, in accordance with the liberalization calendar set by the Energy Regulatory Commission (CRE), gasoline prices were fully freed in the states of Chihuahua, Coahuila, Nuevo León, Tamaulipas, and the municipality of Gómez Palacio (state of Durango), which together account for approximately 16% of gasoline consumption in Mexico.

Inflation is moderating at the margin. The seasonally-adjusted, 3-month, annualized variation of the CPI dropped to 6.64% (from 7.70% in May). As shown in chart 2, this reduction of inflation at the margin is mainly taking place in core goods (tradables), falling to 6.45% (7.93% previously), which is consistent with significant appreciation of the MXN in 2017. Using a similar measure, inflation for the full core index and core services decreased to 6.63% (7.70% previously) and 3.47% (3.52% previously).

Annual inflation rose, pushed up by non-core items. Headline inflation increased to 6.31% year-over-year (from 6.16% in May), while core inflation increased by less (to 4.83%, from 4.78% in May) during the same period. Core goods inflation (6.33%, up from 6.29%) barely rose, and core services inflation increased a bit more (to 3.56%, from 3.50%). Nevertheless, we note that a cleaner indicator of domestic-driven prices (core services excluding telecom and FX-sensitive items) was virtually unchanged at 3.80%. Non-core inflation, in contrast, increased significantly (to 11.09% year-over-year, from 10.60 in May), driven by agricultural prices (8.42%, 6.43 previously) which was partly offset by lower energy inflation (15.02%, 16.09% previously). Inflation for regulated prices was stable at 8.85% year-over-year. Also importantly, we note that a diffusion index, which tracks the percentage of items in the CPI basket with annual inflation higher or equal to 4% (the upper bound of the tolerance range around the Central Bank’s 3 percent target), increased to 77.2% in June (from 75.2% in May).

We expect annual inflation to decrease to 5.4% by the end of 2017. Although non-core inflation has surprised to the upside and diffusion indexes remain on the rise, we believe that disinflation will begin in the coming months, mainly on the back of the lagging effects of MXN appreciation (12%-year-to-date, more than half-way of erasing the 19% depreciation observed in 2016). Weaker activity and lower international oil (and gasoline) prices will also be important to bring inflation down.


Alexander Müller



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