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We expect another 50-bp rate hike in first meeting of next year

Julio Ruiz


CPI posted a bi-weekly rate of 0.39% in the first half of December (from 0.10% a year ago and compared with a five-year median of 0.35%), above our forecast of 0.25%, but broadly in line with market expectations of 0.38% (as per Bloomberg). Lower gas prices (-3.08%) and well-behaved non-core CPI food (0.34%) continue to help headline inflation, while core inflation remains relatively pressured (0.57% versus consensus of 0.56% and compared to 5-year median of 0.43%) mainly driven by core goods (0.62% versus 5-year median of 0.28%). We note other core services (0.91% versus 5-year median of 1.08%) reflect a seasonal increase due to higher transport tariffs associated to holidays.

On an annual basis, headline inflation rebounded to 7.77% in 1H December (from 7.46% in 2H November), while core inflation slowed down slightly to 8.35% (from 8.37%). The slight deceleration in annual core inflation was aided by services CPI (5.22%, from 5.29%), while core goods food and non-food annual inflation stood at 14.13% (from 14.08%) and 7.68% (from 7.67%), respectively. Our diffusion index, looking at the percentage of items with annual inflation above the upper bound of the central bank target, remains at a high 82.6% in the first half of December, but down from a peak of 87.6% in 1H of October.

Slower inflation at the margin, but still at high levels. Assuming bi-weekly inflation in line with the five-year median variation in the second half of December, the seasonally adjusted three-month annualized headline inflation was 5.01% in December (from 5.74% in November), while core inflation stood at 7.64% (from 8.61%).

Core inflation sub-indexes calculated 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, showed inflation closely associated with the output gap (fundamental inflation) is decelerating (6.80% in 1H December, from 6.88% in 2H November and down from a peak of 7.04% in 1H November). Sub-indexes associated to supply shock rebounded slightly in 1H December (relative to 2H November): energy commodity prices (8.14%, from 8.06%); currency (7.84%, from 7.81%) and salary (6.39%, from 6.35%).

We expect inflation to slow down next year to 5.2% aided by lower commodity prices, a tighter monetary policy stance and poor activity. Still high inflation will likely prevent Banxico from decoupling from the Fed at least in the next monetary policy meeting in February 2023 (we expect a 50-bp rate hike). Our terminal policy rate forecast stands at 11.25% in the 1Q23.

Julio Ruiz