Julio Ruiz
24/01/2023
CPI posted a bi-weekly rate of 0.46% in the first half of January (from 0.39% a year ago and compared with a five-year median of 0.27%), above our forecast of 0.34% and market expectations of 0.39% (as per Bloomberg). ore inflation also surprised to the upside (0.44% versus our forecast and market consensus of 0.32%), which compares to 0.34% a year ago and 5-year median of 0.20%. Core inflation was pressured by goods prices (0.55% versus 5-year median of 0.42%) which in part reflects an increase in the excise tax to some products such as cigarettes and sugary drinks. Other core services CPI also exerted relevant upward pressure (0.30% versus 5-year median of -0.29%), driven by restaurants CPI which mitigated a seasonal fall in services prices associated to tourism.
On an annual basis, headline inflation increased to 7.94% in 1H January (from 7.86% in 2H December), while core inflation stood at 8.45% (from 8.34%). Core inflation was driven mainly by other core services CPI (7.47%, from 6.99%), while food and non-food core inflation fell slightly to 14.09% (from 14.14%) and 7.57% (from 7.69%), 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 83.3% in the first half of January, 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 January, the seasonally adjusted three-month annualized headline inflation was 4.28% in January (from 4.84% in December), while core inflation stood at 7.48% (from 7.83%).
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) rebounded in 1H January (7.05%, from 6.75% in 2H December). Sub-indexes associated to supply shocks of energy commodity prices (8.23% in 1H January, from 8.17% 2H December) and currency (8.00%, from 7.89%) increased slightly, while sub-indexes associated to salary stood practically unchanged at 6.44%.
Inflation will likely end this year at 5.2% aided by lower commodity prices, a tighter monetary policy stance and poor activity. Our base case is for Banxico to slow down the pace of rate hikes to 25-bp (from 50-bp) in the February meeting (reaching a level of 10.75%), contingent on the Fed slowing down the pace of hikes in the same magnitude.
Julio Ruiz