MEXICO – Core inflation accelerated further in July

Core food and services CPI exerted upward pressure to core inflation

Julio Ruiz


CPI increased 0.59% month over month in July (from 0.66% a year ago and 5-year median figure of 0.38%), below our forecast of 0.61% and above market expectations of 0.57% (as per Bloomberg). Core inflation stood at 0.48% (from 0.40% a year ago and 5-year median of 0.27%), below our forecast of 0.51% and in line with market expectations. Upside pressure to headline inflation came mainly from core CPI which was driven by core food prices (0.80% versus 0.58% a year ago and 5-year median of 0.40%), associated to high commodity prices, and other core services CPI (0.54% versus 0.17% a year ago and 5-year median of 0.55%) amid the reopening of the economy. On the non-core CPI side, energy prices also posted additional upside pressure (1.49%), with Gas LP prices (5.77%) having the largest incidence.

Headline and core inflation remain above the upper bound of the central bank inflation target of 4%. On an annual basis, headline inflation stood at 5.81% in July (from 5.88% in June), while core inflation accelerated to 4.66% (from 4.58%).  Looking at bi-weekly annual inflation for the 2H of July, both headline (5.86%, from 5.75% in 1H July) and core (4.68%, from 4.64%) CPI accelerated further. Within core CPI, food and other services annual inflation increased to 6.14% in July (from 5.91% in June) and 5.17% (from 4.78%), respectively, while core non-food CPI stood at 5.30% (from 5.69%).

At the margin, core inflation accelerated. Using seasonally adjusted figures, the three-month annualized measure of headline inflation stood at 7.16% in July (from 8.85% in June), while core inflation accelerated to 6.40% (from 6.11%).

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 part of core inflation affected by energy commodity prices and currency remains pressured.

Stubborn core inflation supports our call of the central bank hiking its policy rate by 25-bps (reaching a level of 4.50%) this Thursday.

Julio Ruiz