MEXICO – Stubborn core inflation

Large core inflation upside surprise in 1H October

Joao Pedro Resende & Julio Ruiz


Mexico’s CPI posted a bi-weekly rate of 0.54% (from 0.54% a year ago and compared to 5-year median of 0.49%), above our forecast of 0.40% and broadly in line with market expectations of 0.52% (as per Bloomberg). Headline inflation reflects pressure mainly from a large upside surprise in core inflation (bi-weekly rate of 0.33% versus our forecast of 0.19% and market expectations of 0.20%), the removal of the seasonal subsidy to electricity tariffs (18.80%) and gas prices (4.42%) which was mitigated by a fall in non-core fruits & vegetables prices (-1.5%).

On an annual basis, headline inflation stood practically unchanged at 6.12% in 1H October (from 6.13% in 2H September), but with core inflation accelerating to 5.12% (from 4.93%). Within core inflation, core goods CPI (6.51%) continues to be the main driver, with both food (7.03%, from 6.89%) and non-food (5.93%, from 5.54%) prices accelerating.  In turn, core services CPI stood at 3.58% year over year (from 3.46%) driven mainly by other services (4.99%, from 4.83%) associated to the reopening of the economy. We also note that our diffusion index, percentage of items with annual inflation above the upper bound central bank target of 4%, stood at a high 70.9% in 1H October (from 65.6% in 2H September and 55.5% in 1H January).

At the margin, headline and core inflation stood above the upper bound central bank target. Assuming bi-weekly inflation in line with the 5-year median variation in the second half of October, the three-month annualized headline inflation was 5.77% in October (from 5.14% in September), while core inflation stood at 5.82% (from 5.83%).

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.

In our view, inflation figures are consistent with our scenario of further policy rate hikes during the rest of the year, with risks tilted towards pace acceleration. We expect a 25-bp rate hike in each of the last two meetings of the year (November and December), reaching an end of year policy rate of 5.25%. 

Julio Ruiz