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One-off price adjustments pressured core inflation

Julio Ruiz


Headline CPI increased 0.68% mom in January (from 0.59% a year ago and a five-year median figure of 0.53%), broadly in line with market consensus of 0.67% (as per Bloomberg) and above our forecast of 0.63%. The headline figure reflects upside pressure from Core CPI of 0.71% (also broadly in line with market expectations of 0.70%) driven by still high core food inflation (1.25% versus 5-year median of 0.90%), core housing services (0.47% versus 5- year median of 0.26%) and other services (0.48% versus 5-year median of -0.13%). The latter two are associated mainly to adjustments in housing costs and restaurants prices given the high inflation last year. Non-core CPI also reflects upside pressure from a seasonal increase in government regulated tariffs (1.23% versus 5-year median of 1.03%).

Annual headline inflation increased to 7.91% in January (from 7.82% in December), while core inflation stood at 8.45% (from 8.35%). While core goods food started to slow in January (14.08%, from 14.14%), we note housing and other services CPI increased to 3.38% (from 3.17%) and 7.53% (from 7.07%), respectively. 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 still high 82.9% in January.

At the margin, core inflation also increased in January. Using seasonally adjusted figures, the three-month annualized measure of headline inflation was 4.34% in January (from 4.84% in December), while core prices increased 7.88% (from 7.77%).

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) rebounded in January to 7.13% (from 6.77% in January). The components of core inflation affected by energy commodity prices, salary and currency stood at 8.25% in January (from 8.15% in December), 6.45% (from 6.43%) and 8.01% (from 7.86%), respectively.

​​​​​​We expect Banxico to hike its policy rate by 25-bp later today, reaching a level of 10.75%. Further interest rate increases are possible, given still-high inflation and uncertainty over the terminal policy rate of the Fed.

Julio Ruiz