Itaú BBA - MEXICO – Headline inflation slowed down, but core inflation remains under pressure

Macro Latam

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MEXICO – Headline inflation slowed down, but core inflation remains under pressure

junio 24, 2019

Headline inflation reached the upper bound of the range around central bank’s target.

CPI was pulled down by energy and non-core agro prices. Mexico’s CPI posted a bi-weekly rate of 0.01% in the first half of June (from 0.13% a year ago), below our forecast (0.14%) and median market expectations of 0.04% (as per Bloomberg). CPI was pulled down by a fall in non-core energy prices (-0.76%, from 1.32% year ago), while non-core agro prices fell by 0.44% (from -0.70% a year ago). In turn, core CPI grew 0.16% (from 0.08% a year ago). 

On an annual basis, headline inflation slowed down, reaching the upper bound of the range around central bank’s target, but core inflation accelerated. On an annual basis, headline inflation decelerated to 4.00% in the 1H of June (from 4.13% in the 2H of May). However, core CPI accelerated to 3.87% (from 3.78%), pressured by both core services (3.76%, from 3.68%) and core goods (3.94%, from 3.83%). A cleaner indicator for prices driven by domestic demand (core services excluding telecom, tourism related services and airfares) remained practically unchanged at 3.96%. In turn, non-core inflation decelerated to 4.34% (from 5.15%), dragged mainly by a deceleration in energy prices (3.34%, from 5.51%).

At the margin, headline inflation slowed down, but core inflation accelerated. Assuming bi-weekly inflation in line with the 5-year median variation in the second half of June, we estimate that seasonally-adjusted three-month annualized inflation stood at 4.29% in June (from 5.43% in May) for the CPI and 4.23% (from 3.98% in May) for the core index. Also, we note that the diffusion index, which tracks the percentage of items in the CPI basket with annual inflation higher or equal to four, increased slightly to 50.6% in the 1H of June, up from 50.2% in the 2H of May.

We expect inflation to end 2019 at 3.7%. Although headline inflation slowed down, the acceleration in core inflation will add pressure on Banxico’s board members to keep a hawkish stance. Moreover, the uncertainties over Mexico’s economy continue to constitute upside risks for inflation (through a weaker currency). In this context, rate cuts are unlikely soon. 

Julio Ruiz



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