CPI posted a bi-weekly rate of 0.30% in the first half of February (from 0.42% a year ago and compared with a five-year median of 0.20%), slightly below our forecast of 0.31% and below market expectations of 0.35% (as per Bloomberg). Core inflation also surprised to the downside (0.35% versus our forecast of 0.38% and market consensus of 0.39%), which compares with 0.43% a year ago and 5-year median of 0.26%. Lower than expected core goods and housing CPI explain the core inflation deviation from our forecast. However, we note education CPI posted a bi-weekly rate of 0.60% (significantly above the 5-year median of 0.22%), likely reflecting one-off tuition adjustments given high inflation last year.
On an annual basis, headline and core inflation fell to 7.76% in 1H February (from 7.88% in 2H January) and 8.38% (from 8.46%), respectively. Looking at core CPI breakdown, core goods food (13.86%, from 14.08%) and non-food (7.34%, from 7.49%) inflation fell further, while services CPI increased slightly to 5.58% (from 5.54%) driven by education CPI (4.78%, from 4.46%). 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 February.
At the margin, headline inflation rebounded., while core inflation is moderating. Assuming bi-weekly inflation in line with the five-year median variation in the second half of February, the seasonally adjusted three-month annualized headline inflation was 5.96% in February (from 4.61% in January), while core inflation stood at 7.37% (from 7.92%).
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) stood unchanged in 1H February at 7.22%. Sub-indexes associated to supply shocks of energy commodity prices (8.19% in 1H February, from 8.28% 2H January) and currency (7.88%, from 8.01%) fell slightly, while sub-indexes associated to salary increased to 6.51% (from 6.45%).
In our view, today’s inflation figure is consistent with Banxico slowing down the hiking pace to 25-bp (from 50-bp) in the March meeting. Our terminal policy rate forecast is at 11.50%, which implies two 25-bp rate hikes more (March and May). Looking ahead, we think that the central bank will only start cutting rates during the first half of next year.