Itaú BBA - MEXICO – Inflation was above expectations in 1H October

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MEXICO – Inflation was above expectations in 1H October

October 22, 2020

Persistence 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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