MEXICO – Inflation surprised to the upside again in 1H July, increasing further the odds of another rate hike in August

Higher interest rates ahead are likely

Julio Ruiz


Another large upside surprise in headline and core inflation in the first half of July. Mexico’s CPI posted a bi-weekly rate of 0.37% (from 0.36% a year ago and compared to 5-year median of 0.28%), above our forecast of 0.14% and market expectations of 0.23% (as per Bloomberg). Core biweekly inflation stood at 0.31% (from 0.25% a year ago and compared to 5-year median of 0.19%), also above our forecast of 0.20% and median market expectations of 0.23%. Upside pressure in core inflation came from both food (0.50% versus 5-year median of 0.22%) and other services (0.40% versus 5-year median of 0.34%), with the later pressured by items associated to the reopening of the economy such as small restaurants and air transportation. We also note that within core food CPI, tortilla maize prices exerted important upward pressure associated to high energy and food commodity prices.

Core inflation accelerated in the 1H of July. On an annual basis, headline inflation remained practically unchanged at a high 5.75% in 1H July (from 5.74% in 2H June), pressured by core inflation (4.64%, from 4.58%) and despite the fading away of the unfavorable base effect (lower energy prices a year ago). Within core inflation, core goods CPI (5.71%) was pressured mainly by food prices (6.07%, from 5.88%). In turn, core services CPI stood at 3.46% (from 3.33%) driven mainly by other services, which stood at a high 5.20% (from 4.97%) driven by items associated to the easing of social distancing measures. We note that core inflation excluding items associated to the reopening of the economy remained stubborn at 4.53% (from 4.51%).

At the margin, core inflation also accelerated. Assuming bi-weekly inflation in line with the 5-year median variation in the second half of July, the three-month annualized headline inflation was 6.97% in July (from 8.83% in June), while core inflation stood at 6.29% (from 6.09%).

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) is above the central bank target, while the part of core inflation affected by energy commodity prices remains stubborn.

We expect inflation at 5.7% for end of year 2021 but with an upward bias. Stubborn inflation figures support our call of Banxico hiking its policy rate by 25-bps in the next monetary policy meeting (August 12). In our view, Banxico will likely opt to hike the policy rate sooner rather than later to keep inflation expectations contained (one of the main arguments of the June’s policy rate hike). 

Julio Ruiz