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Downside surprise was driven mainly by the non-core index and slightly by core CPI.
24/05/2023 | Julio Ruiz

CPI posted a bi-weekly rate of -0.32% in the first half of May (from -0.06% a year ago and compared with a five-year median also of -0.06%), below our forecast of -0.19% and market consensus of -0.20% (as per Bloomberg). Downside pressure to the headline figure came mainly from the non-core index (-1.85%) dragged by a seasonal subsidy to electricity tariffs, fuel prices and non-core food CPI (mainly chicken and egg prices).  Core inflation also surprised slightly to the downside, with a bi-weekly rate of 0.18% (from 0.24% a year ago and compared with a five-year median of 0.31%) versus our forecast and market consensus both at 0.21%.


On an annual basis, headline and core inflation fell to 6.00% in 1H May (from 6.27% in 2H April) and 7.45% (from 7.59%), respectively. Looking at core CPI breakdown, food (11.60%, from 11.91%) and non-food goods (6.37%, from 6.45%) inflation fell further, while services inflation stood at 5.44% (from 5.51%). Other services CPI also fell to 7.02% (from 7.18%). 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 74.2% in the first half of May.



At the margin, headline and core inflation also eased. Assuming bi-weekly inflation in line with the five-year median variation in the second half of May, the seasonally adjusted three-month annualized headline inflation was 3.42% in May (from 3.90% in April), while core inflation stood at 4.78% (from 5.48%).


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 further in 1H May to 6.09% (from 6.27% in 2H April). Inflation sub-indexes associated to supply shocks of energy commodity prices (7.61% in 1H May, from 7.79% 2H April), currency (6.15%, from 6.28%) and salary (7.29%, from 7.44%) also fell.


Our end of year inflation forecast stands at 4.8%. Still high core inflation and our view of the Fed holding rates throughout 2023 will likely lead the central bank of Mexico to keep its policy rate unchanged this year at 11.25%.