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We expect rate cuts in 4Q23.
03/07/2023 | Julio Ruiz

Headline CPI increased 0.10% mom in June (from 0.84% a year ago and a five-year median figure of 0.53%), broadly in line with market consensus of 0.09% (as per Bloomberg), but above our forecast of 0.01%. Downside pressure to headline CPI came mainly from the non-core component (-0.52% mom) dragged by the food index (eggs and chicken prices) and lower gas tariffs. Core inflation stood at 0.30% mom (from 0.77% a year ago and 5-year median of 0.37%), slightly above market expectations of 0.27% and our forecast of 0.26%.


On an annual basis, headline and core inflation fell further to 5.06% in June (from 5.84% in May) and 6.89% (from 7.39%), respectively. The decline in total inflation continues to be driven mainly by the volatile non-core index (-0.36% yoy), while within core inflation, core goods (8.26% yoy in June, from 9.04% in May) is the main downward factor. On the other hand, core services inflation is falling more slowly (relative to core goods), which stood at 5.25% in June (from 5.43% in May). Our diffusion index, looking at the percentage of items with annual inflation above the upper bound of the central bank target, stood at 72.2% in June.


At the margin, headline and core inflation eased further in June. Using seasonally adjusted figures, the three-month annualized measure of headline inflation was 2.07% in June (from 2.94% in May), while core prices fell to 3.74% (from 4.73%).  


Core inflation sub-indexes developed by the central bank, that break down the effect of supply (currency, wages and energy prices) and demand shocks (output gap) on prices, indicate that inflation closely associated with the output gap (fundamental inflation) fell to 5.59% in June (from 6.02% in May). The components of core inflation affected by energy commodity prices, salary and currency also slowed to 7.16% in June (from 7.61% in May), 5.74% (from 6.05%) and 6.81% (from 7.28%), respectively.


A strong currency and lower commodity prices will help inflation to reach our yearend estimate of 4.5%. As annual inflation eases more clearly towards the end of the year, we expect Banxico to begin an easing cycle with two 25-bp rate cuts (November and December) in the last quarter of the year, reaching a level of 10.75%.