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Inflation was broadly in line with market expectations

Julio Ruiz


Headline CPI increased 0.38% mom in December (from 0.36% a year ago and a five-year median figure of 0.56%), below our forecast of 0.44% and broadly line with market expectations of 0.39% (as per Bloomberg). The headline figure reflects downside pressure from energy prices in non-core CPI (gas and gasoline), mitigating core CPI pressures (0.65%, from 0.80% a year ago and 5-year median of 0.47%) which was in line with market expectations. Within core CPI, core goods prices remain pressured (0.74% versus 5- year median of 0.34%), while other services CPI reflect a seasonal increase of 0.85% (versus 5-year median of 1.00%) driven by air and bus tariffs given the holidays.

Core annual inflation peaked in November.Core inflation fell to 8.35% yoy in December (from 8.51% in November), while headline inflation stood at 7.82% (from 7.80%). The deceleration in core inflation was aided by core goods prices (11.09% in December, from 11.28% in November) helped by non-food items, while services CPI stood at 5.19% (from 5.35%). Still, we note inflation remains broad-based. Our diffusion index, looking at the percentage of items with annual inflation above the upper bound of the central bank target, came in at a high 83.3% in December.

At the margin, both headline and core CPI slowed down. Using seasonally adjusted figures, the three-month annualized measure of headline inflation was 4.85% in December (from 5.71% in November), while core inflation stood at 7.84% (from 8.66%).

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 shocks (output gap) on prices, indicate that inflation closely associated with the output gap (fundamental inflation) also peaked in November (6.96% yoy), reaching 6.77% in December. While the components of core inflation affected by energy commodity prices (8.15% in December, from 8.31% in November) and currency (7.86%, from 8.03%) also peaked in November, components of core inflation associated to salary accelerated further to 6.43% (from 6.32%).

We expect inflation to slow down this year, to 5.2%, aided by lower commodity prices, a tighter monetary policy stance and soft activity.We expect Banxico delivering another 50-bps rate hike in the February meeting (contingent the Fed hikes in the same magnitude). However, our call has a downward bias; we note there is a possibility of Banxico slowing down the pace of rate hikes to 25-bp in the next meeting (even if the Fed hikes by 50-bp).

Julio Ruiz