Itaú BBA - MEXICO – Inflation falls further, but core remains sticky

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MEXICO – Inflation falls further, but core remains sticky

julio 24, 2019

Headline and core inflation slowed down, remaining below the upper bound of the range around central bank’s target.

Inflation was in line with market expectations. Mexico’s CPI posted a bi-weekly rate of 0.27% in the first half of July (from 0.32% a year ago), in line with our forecast and median market expectations (as per Bloomberg). Looking at the breakdown, core CPI posted a bi-weekly rate of 0.17% (from 0.19% a year ago), while non-core inflation stood at 0.60% (from 0.71% a year ago). 

On an annual basis, both headline and core inflation fell somewhat, remaining below the upper bound of the range around central bank’s target, but still above the 3% target. On an annual basis, CPI decelerated slightly to 3.84% in the 1H of July (from 3.89% in the 2H of June). Likewise, core inflation reached 3.81% in the 1H of July (from 3.83% in the 2H of June), with prices for goods decelerating (3.79%, from 3.90%), while services accelerated (3.83%, from 3.75%). In turn, non-core inflation fell to 3.92% (from 4.04%), dragged mainly by a deceleration in energy prices (1.19%, from 1.68%). 

At the margin, headline and core inflation also slowed down. Assuming bi-weekly inflation in line with the 5-year median variation in the second half of July, we estimate that seasonally-adjusted three-month annualized inflation stood at 4.14% in July (from 4.54% in June), while core fell to 3.91% (from 4.33% in June). 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, stood at 48.3% in the 1H of July (practically unchanged from the 2nd half of June). 

We expect inflation to end 2019 at 3.7%. We believe Banxico needs to see a more significant deceleration in core inflation to feel comfortable and start an easing cycle. So the CPI figure for the first half of July decreases the probability of a cut in August (we expect rate cuts starting in September’s meeting). 


Julio Ruiz



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