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< BackPersistence in inflation increases the odds of Banxico pausing its easing cycle
Headline inflation in the first half of October was above market expectations. Mexico’s CPI posted a bi-weekly rate of 0.54% (from 0.40% a year ago), broadly in line with our forecast of 0.52% and above market expectations of 0.46% (as per Bloomberg). The headline figure reflects the seasonal removal of the subsidy to electricity tariffs and upside pressure from non-core agro prices. Meanwhile, core inflation stood at 0.14% (in line with our forecast and broadly in line with market expectations of 0.15%).
Core goods prices is the main driver of inflation. Headline annual inflation stood at 4.09% in 1H October (from 3.93% in 2H September), with core inflation at 4.00% (practically unchanged from last reading). Within core inflation, core goods CPI continues to grow above the upper bound around the central bank’s inflation target (5.45%, practically unchanged from the 2H of September), with processed food and other goods inflation at 6.98% (from 7.00%) and 3.81% (from 3.79%), respectively. Meanwhile, core services annual inflation continues to be subdued (2.44%, from 2.41%), pressured down by the widening of negative output gap.
At the margin, headline and core inflation slowed down in October, but they are still at a high level. Assuming bi-weekly inflation in line with the 5-year median variation in the second half of October, the seasonally-adjusted three-month annualized inflation decelerated to 4.20% in October (from 5.02% in September), while core inflation stood at 4.11% (from 4.64%).
We expect inflation at 3.8% for year-end 2020. The persistence in headline and core inflation increases the odds of Banxico pausing its easing cycle (we expect a year-end policy rate of 4.25%) in the next monetary policy meeting in November.
Julio Ruiz
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