Itaú BBA - MEXICO - Inflation pressured by weaker peso

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MEXICO - Inflation pressured by weaker peso

February 23, 2017

Tradable prices are increasing at a faster pace

Mexico’s CPI posted a 0.33% bi-weekly variation in the first half of February – broadly in line with our forecast (0.32%) and market expectations (0.30%, as per Bloomberg) – with tradable goods’ prices (sensitive to peso depreciation) accounting for the bulk of the increase. In fact, core goods (proxy for tradables) were up by 0.7%, contributing 0.24p.p. to bi-weekly inflation. Even though the update of gasoline prices that was scheduled to take place in the first half of February was postponed (resumed on February 18), energy prices increased 0.4% because of higher natural gas (5.7%) and liquefied petroleum gas (1.3%) prices. Conversely, agricultural prices dropped 1%, offsetting part of the upward pressure. As shown in chart 1, CPI inflation was above its 5-year median (0.18%) in the first half of February 2017, suggesting that it deviated from its normal behavior (although not as much as in January, when the liberalization of gasoline prices resulted in a sharp CPI increase).

Annual headline inflation increased a bit – to 4.71% in the first half of February, from 4.66% in the second half of January – further above the Central Bank’s 3-percent target, with a significant acceleration in inflation for tradable goods. Core inflation rose from 3.95% to 4.20% during the same period, pressured by core goods (tradables) whose inflation is now running at 5.27% (4.96% previously). We believe this is largely a consequence of a weaker exchange rate. In contrast, core services (non-tradables) inflation is standing at a moderate level (3.29%, 3.10% previously). On the non-core side (6.25%, 6.79% previously), the decrease in the first half of February was driven by abnormally low agricultural inflation (-2.92%, from -0.71%) while energy & regulated prices remain running high (12.26%, from 11.63%).

We expect inflation to increase to 5% by the end of 2017, driven by the lagged effects of peso depreciation. There’s also a risk that domestic gasoline prices could increase somewhat more, as the liberalization implies that they will increasingly depend on U.S. wholesale gasoline prices and the USDMXN exchange rate. Nevertheless, the government has recently announced that it will adjust the excise tax to smooth out any spikes in gasoline prices, at least in the transition to full liberalization (which will be completed in December 2017). Looking beyond that, we believe inflation will moderate to 3.3% in 2018, as temporary shocks (gasoline spike and peso depreciation) dissipate and domestic demand slows down. Moreover, in our view, the tightening of monetary policy will likely keep long-term inflation expectations anchored and thus prevent the materialization of second-round effects.


Alexander Müller 



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