Itaú BBA - MEXICO – Inflation surprised to the upside again in 1H August

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MEXICO – Inflation surprised to the upside again in 1H August

August 24, 2020

Core goods CPI still growing above Banxico’s inflation target of 3%

Inflation in the first half of August was once again above market expectations. Mexico’s CPI posted a bi-weekly rate of 0.24% (from -0.08% a year ago), above our forecast of 0.07% and market expectations of 0.13% (as per Bloomberg). Core inflation also surprised to the upside (0.18%, compared to our forecast of 0.17% and market expectations of 0.14%) due to pressure from core goods (0.26%, from 0.15% a year ago) and despite the fall of 0.03% in education services which has a 5-year median of 0.97% reflecting the start of the school year.

Core goods CPI continues to increase above Banxico’s inflation target of 3%. Headline CPI increased 3.99% year-over-year in 1H August (from 3.66% in 2H July), with core inflation also accelerating further, reaching 3.93% (from 3.86%). Within core inflation, core goods inflation accelerated to 5.32%, from 5.20%, with processed food inflation at a high 7.02% (from 6.90%) and other goods at 3.50% (from 3.38%). The persistence in core goods inflation is associated to supply/demand shocks due to the Covid outbreak. Meanwhile, core services stood at 2.43% (from 2.41%), with core services excluding tourism related services and airfares decelerating further (2.68%, from 2.80%), reflecting downward pressure from the widening of the negative output gap. Finally, non-core CPI gained 4.18% (from 3.05%), pressured mainly by agro prices (12.95%, from 8.83%).



At the margin, headline and core inflation slowed down in August, but continue at high levels. Assuming bi-weekly inflation in line with the 5-year median variation in the second half of August, the seasonally-adjusted three-month annualized inflation decelerated to 6.61% in August (from 9.23% in July), while core inflation stood at 4.90% (from 5.08%).



We expect inflation at 3.7% for year-end 2020. While our base case is for Banxico to cut its policy rate by 25-bps in the next monetary policy meeting (September 24), inflation numbers increase the odds of Banxico pausing the cycle.

Julio Ruiz

 



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