Itaú BBA - MEXICO – Inflation surprised to the downside, with core still at a high level

Macro Latam

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MEXICO – Inflation surprised to the downside, with core still at a high level

agosto 22, 2019

Headline inflation decelerated, dragged by non-core prices.

Inflation came in below market expectations. Mexico’s CPI posted a bi-weekly rate of -0.08% in the first half of August (from 0.34% a year ago), below our forecast of 0.07% and median market expectations of 0.14% (as per Bloomberg). CPI figure was driven down by non-core CPI, which fell by 0.66% (from 0.86 a year ago), with non-core food and energy prices falling 1.44% and 0.08%, respectively. In turn, the core bi-weekly rate stood at 0.11% (from 0.18% a year ago). Regarding core CPI services, we note that a the fall in airfare tariffs (-5.72%), after summer holidays, was partially offset by an increase in education services (high school: 1.85% and university: 1.38%). 

On an annual basis, headline inflation fell. CPI decelerated to 3.29% year-over-year in the 1H of August (from 3.72% in the 2H of July). In turn, core prices decelerated only slightly (3.77%, from 3.83%), with prices for goods decelerating (3.75%, from 3.91%), while services accelerated slightly to 3.79% (from 3.75%). A cleaner indicator for prices driven by domestic demand (core services excluding telecom, tourism related services and airfares) also fell slightly to 3.93% (from 3.95%). In contrast, non-core inflation fell to 1.81% (from 3.37%), dragged mainly by a deceleration in food prices (3.52%, from 5.97%), while energy prices fell 1.02% (from 0.33%). 

At the margin, headline inflation slowed down, while core inflation remained persistent. Assuming bi-weekly inflation in line with the 5-year median variation in the second half of August, we estimate that seasonally-adjusted three-month annualized inflation stood at 2.39% in August (from 3.86% in July), while core inflation remained persistent at 3.96% (from 3.94% in July). The diffusion index, which tracks the percentage of items in the CPI basket with annual inflation higher or equal to four, fell to 42.5% in the 1H of August (from 46.8% in the second half of July).

We now expect inflation to end 2019 at 3.5% (3.7% previously).  Although core inflation remained persistent, Banxico seems to have diverted away their focus from this indicator (as seen the last monetary policy statement). Thus, we believe the fall in headline inflation increases the odds of further monetary easing in the short-term. We expect the policy rate to end this year at 7.25% (from a current level of 8%).

Julio Ruiz

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