MEXICO – Headline inflation fell aided by lower gas prices, but core inflation surprised to the upside

Core inflation accelerated further in the 1H of August

Julio Ruiz


Headline inflation surprised to the downside aided by a fall in gas prices, but core inflation surprised to the upside again. Mexico’s CPI posted a bi-weekly rate of -0.02% (from 0.24% a year ago and compared to 5-year median of 0.31%), below our forecast of 0.13% and market expectations of 0.05% (as per Bloomberg). Headline inflation was pressured down by gas prices (fell by 15.1%) due to a new policy to smooth price movements (set max gas prices each week, depending on wholesale prices, transportation costs, a profit margin and a factor to smooth movements), which helped to offset upside pressure from non-core food prices (1.18%) and core CPI, which surprised again to the upside (0.28% versus our forecast of 0.19% and market expectations of 0.20% and from 0.18% a year ago). Core inflation was pressured mainly by core goods CPI (0.47% versus 5-year median of 0.27%).   

Core inflation accelerated further in the 1H of August. On an annual basis, headline inflation slowed down to 5.58% in 1H August (from 5.86% in 2H July), but with core inflation accelerating to 4.78% (from 4.68%). Within core inflation, core goods CPI (5.99%) was pressured by both food (6.45%, from 6.21%) and non-food (5.49%, from 5.29%) prices. In turn, core services CPI stood at 3.44% (from 3.47%) driven mainly by other services (4.94%, from 5.14%). We also note that education services accelerated to 1.83% (from 1.29%) reflecting an unfavorable base effect as tuition fees were barely adjusted a year ago due to the outbreak.

At the margin, headline inflation decelerated sharply aided by lower gas prices. Assuming bi-weekly inflation in line with the 5-year median variation in the second half of August, the three-month annualized headline inflation was 4.72% in August (from 6.88% in July), while core inflation stood at 5.97% (from 6.38%).

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 (output gap) shocks on prices, show inflation closely associated to the output gap (fundamental inflation) remains persistently above the central bank target, while the part of core inflation affected by energy commodity prices remains stubborn.

We expect inflation at 6.0% for end of year 2021. While the sharp fall in gas prices aided headline inflation to slow down in the beginning of August, the new policy still shows higher prices ahead (a biweekly increase of around 1.2% in 2H August), consistent with higher energy commodity prices. Moreover, Banxico will likely continue to be uncomfortable with stubborn core inflation, consistent with further rate hikes ahead (we expect an end of year policy rate of 5.25%, which implies 25-bp rate hike in each of the three remaining meetings of the year), in our view.  

Julio Ruiz