Itaú BBA - MEXICO – January CPI decelerated by more than expected in January

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MEXICO – January CPI decelerated by more than expected in January

February 7, 2019

Lower energy prices and VAT in the northern frontier exerted downward pressure

The CPI posted a monthly inflation below market expectations in January. Inflation came in at 0.09% month-over-month in January (compared to the 5yr median of 0.53%), below our forecast of 0.21% and market expectations of 0.18% (as per Bloomberg). The monthly low figure is partly due to the effect of a lower VAT in the northern frontier (7.9% of the index), as the CPI aggregate of the northern frontier posted -1.10% month-over-month (compared to the 5yr median of 0.93%). Energy prices also exerted a significant downward pressure: energy CPI posted a deflation of 1.47% month-over-month (compared to the 5yr median of +1.86%), thanks to lower international oil prices. 

On an annual basis, headline inflation decelerated, helped mainly by lower energy prices. Headline inflation decreased to 4.37% year-over-year in January (from 4.83% in December). Looking at the breakdown, core inflation decreased to 3.60% (from 3.68% in December), with core-goods (tradables) decelerating to 3.66% (from 3.92%), while core services increased somewhat to 3.51% (from 3.47%). A cleaner indicator for prices driven by domestic demand (core services excluding telecom, tourism related services, and airfares) decelerated mildly to 3.62% year-over-year (from 3.66% in December). Likewise, non-core inflation decelerated to 6.81% year-over-year in January (from 8.39% in December), with energy prices decelerating the most to 7.36% (from 11.62%), while agro products accelerated slightly to 7.41% (from 7.06%). Within energy prices, regular gasoline (13.46%, from 19.34% previously) and LP Gas (-1.62%, from 3.93%) prices decelerated substantially.

At the margin, headline and core inflation also slowed down. Using seasonally adjusted three-month annualized figures, inflation posted a 2.83% rate in January (from 4.59% in December), while core index decelerated slightly to a still-high 3.76% in January (from 4.11% in December).

We expect inflation to reach 3.8% for the end of this year. The most recent figure reflect lower VAT in the northern frontier, which is one-off. Looking forward, lower oil prices should exert less pressure on the non-core component. However, upside risks to inflation remain due to: remaining uncertainties over the approval in the U.S. congress of the renegotiated NAFTA and the uncertainty over domestic policy direction, at a time that the economy is operating with no slack. 

Julio Ruiz

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