CPI posted a bi-weekly rate of 0.15% in the first half of March (from 0.48% a year ago and compared with a five-year median of 0.29%), below our forecast of 0.20% and market consensus of 0.26% (as per Bloomberg). The downside surprise in headline inflation was driven by non-core CPI (-0.31% versus 5-year median of 0.49%) aided by food and energy prices, while core inflation stood in line with market consensus at 0.30% (from 0.35% a year ago and 5-year median of 0.24%). The main upside pressure in core inflation came from other services CPI (0.59% versus 5-year median of 0.32%) pressured by an increase in airfares & tourism packages prices (likely associated to the upcoming easter holidays) and restaurants. We note core goods food (0.29% versus 5-year median of 0.23%) and non-food (0.22% versus 0.19%) CPI posted a bi-weekly rate closer to historical median.
On an annual basis, headline and core inflation fell to 7.12% in 1H March (from 7.48% in 2H February) and 8.15% (from 8.21%), respectively. Looking at core CPI breakdown, food (13.20%, from 13.55%) and non-food goods (6.94%, from 7.10%) inflation fell further, while services CPI increased to 5.68% (from 5.52%) driven by other services (7.70%, from 7.41%). 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 82.3% in the first half of March.
At the margin, headline and core inflation moderated. Assuming bi-weekly inflation in line with the five-year median variation in the second half of March, the seasonally adjusted three-month annualized headline inflation was 4.56% in March (from 5.34% in February), while core inflation stood at 6.96% (from 7.27%).
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) fell in 1H March to 6.79% (from 7.03% in 2H February). Sub-indexes associated to supply shocks of energy commodity prices (8.29% in 1H March, from 8.05% 2H February) and currency (7.95%, from 7.74%) increased, while sub-indexes associated to salary fell slightly to 6.40% (from 6.46%).
In our view, the recent inflation evolution is consistent with Banxico slowing down the hiking pace to 25-bp (from 50-bp) in the March 30 meeting. Our terminal policy rate forecast is at 11.50%, which implies two 25-bp rate hikes more (March and May). Looking ahead, we think that the central bank will only start cutting rates during the first half of next year.