Itaú BBA - MEXICO – July’s CPI decelerated, but core remains sticky

Macro Latam

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MEXICO – July’s CPI decelerated, but core remains sticky

agosto 8, 2019

Core inflation still sticky

July’s CPI came in broadly line with market expectations. Consumer prices grew 0.38% month-over-month in July (from 0.54% a year ago), slightly above our forecast of 0.37% and market expectations (as per Bloomberg). CPI was pulled down mainly by non-core CPI (0.74%, from 1.27% a year ago), associated to a fall in energy prices (-0.43%, from 1.30% a year ago). In turn, core inflation stood at 0.26% (from 0.29% a year ago).

On an annual basis, headline inflation slowed down, pulled down by energy prices, with core inflation decelerating only slightly. Headline inflation slowed to 3.78% year-over-year in July (from 3.95% in June), staying below the upper bound of the range around central bank’s target for the second month in a row. Core inflation fell slightly to 3.82% in July (from 3.85% in June), with tradables (3.85%, from 3.92%) decelerating, while services (3.79%, from 3.75%) accelerated slightly. A cleaner indicator for prices driven by domestic demand (core services excluding telecom, tourism related services and airfares) remained practically unchanged at 3.95% in July. In turn, non-core inflation fell to 3.64% year-over-year in July (from 4.19% in June), pulled down by energy prices (0.76%, from 2.51%), while non-core food inflation stood at 6.33% (from 6.23%).

At the margin, headline and core inflation decelerated. Using seasonally adjusted three-month annualized figures, headline inflation decelerated to 4.04% in July (from 4.53% in June), while core index decelerated to 3.95% (from 4.34%). The diffusion index, which tracks the percentage of items in the CPI basket with annual inflation higher or equal to four, decreased to 47.9% in July (from 50.2% in June).

We expect inflation to end 2019 at 3.7%. While headline inflation decelerated, we note it was driven mainly by non-core inflation (due to a fall in energy prices), whereas core inflation decelerated only slightly (one of Banxico’s main concern). We believe Banxico needs to see a more significant deceleration in core inflation to feel comfortable to start an easing cycle. So the CPI figure for July decreases the probability of a rate cut in August (we expect rate cuts starting in September’s meeting).

Julio Ruiz

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