MEXICO – Annual core inflation accelerated in August

High inflation is consistent with further rate hikes ahead

Julio Ruiz


CPI increased 0.19% month over month in August (from 0.39% a year ago and 5-year median figure of 0.39%), slightly below our forecast of 0.22% and broadly in line with market expectations of 0.20% (as per Bloomberg).  Core inflation stood at 0.43% (from 0.32% a year ago and 5-year median of 0.25%), also in line with our forecast and market expectations of 0.42%. Upward pressure from core inflation and non-core food prices (3.91%) was mitigated by a sharp 15% fall in gas prices in 1H August due to a new policy dictating prices for the sector. We note gas prices in 2H August increased 0.56%.  

On an annual basis, headline inflation stood at 5.59% in August (from 5.81% in July), while core inflation accelerated to 4.78% (from 4.66%). Within core inflation, core CPI goods accelerated sharply (5.99%, from 5.74%), while core services CPI remained practically unchanged at 3.43% (from 3.46%). We note other core CPI services stood at a high 4.87% (from 5.17%) reflecting the reopening of the economy.

At the margin, headline and core inflation remained at a high level. Using seasonally adjusted figures, the three-month annualized measure of headline inflation stood at 4.84% in August (from 6.89% in July), while core inflation stood at 6.11% (from 6.40%).

Core inflation sub-indexes developed by the central bank, which help to break down the effect of supply (currency, wages and energy prices) and demand (output gap) shocks on prices, show inflation closely associated to the output gap (fundamental inflation) is above the central bank target, while the parts of core inflation affected by energy commodity prices and currency stand above the upper bound of the range around the target.

Amid high inflation (our forecast is at 6.00% for the end of 2021), our base case scenario is for Banxico to hike its policy rate three more times this year (by 25-bps in each meeting), reaching a level of 5.25%.
Still, despite the challenging outlook for inflation, a cycle pause in the short-term can´t be ruled out given existing divisions within the board over how to respond to current inflationary pressures.  

Julio Ruiz​​​​