Itaú BBA - MEXICO – Inflation fell in December despite core inflation increase

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MEXICO – Inflation fell in December despite core inflation increase

January 7, 2021

Non-core food prices exerted downward pressure, which was partly offset by a rebound in core inflation as the “Buen Fin” effect faded away.

Headline and core inflation were broadly in line with market expectations. CPI increased 0.38% month-over-month in December (from 0.56% a year ago), in line with our forecast and broadly in line with market expectations of 0.39% (as per Bloomberg). In turn, core inflation stood at 0.55%, below our forecast (0.60%) and slightly below market expectations of 0.56%. The figure reflects downside pressure from non-core food items (-1.30%), which was partly offset by a rebound in core non-food inflation (1.22%), after falling by 0.78% in November due to an aggressive discount strategy in the “Buen Fin” (Mexico’s black Friday). 

Annual core inflation rebounded in December as the “Buen Fin” effect faded away. On an annual basis, headline inflation stood at 3.15% in December (from 3.33% in November), while core inflation accelerated to 3.80% (from 3.66%). Core inflation was driven by a rebound in non-food inflation (4.14%, from 3.06%) due to the vanishing of the “Buen Fin” effect (mainly reflected clothe prices, shown in our heat map below). In turn, core food annual inflation continued high (6.80%, from 6.79%), while core services annual inflation decelerated further (1.95%, from 2.22%), reflecting the wide negative output gap. Meanwhile, non-core inflation slowed down to 1.18% (from 2.33%) dragged mainly by fruits & vegetable prices (0.10%, from 9.50%). 



At the margin, headline inflation slowed down further, while core inflation accelerated.  Using seasonally adjusted three-month annualized figures, the CPI stood at 0.38% in December (from 0.69% in November), while core CPI stood at 2.72% (from 2.25%).



We expect inflation for 2021 at 3.2%. A wide negative output gap and a stronger currency should keep annual inflation subdued this year, after an expected temporary rebound in the 2Q21, pressured by an unfavorable base effect due to a sharp fall in gasoline prices in 2Q20. 

Julio Ruiz



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