MEXICO — Disinflation continued in 1H July, driven by lower food and energy prices

Bi-weekly CPI for 1H July rose 0.07%, in line with consensus and slightly above our forecast (+0.05%). Core inflation increased 0.16%, marginally exceeding both consensus (+0.15%) and our estimate (+0.11%). Within the core basket, tradable goods prices rose 0.11%, with food prices increasing 0.10% and non-food goods 0.12%, largely reflecting higher computer prices despite declines in several personal care items. Core services advanced 0.20%, driven by gains in other services, including air transportation, tourism-related services and restaurants, likely reflecting seasonal summer travel demand. This more than offset the decline in hotel prices following the end of the World Cup. Housing inflation remained a source of upward pressure, despite a moderation. Non-core prices fell 0.23%, mainly due to lower fruit and vegetable prices, particularly tomatoes, chili peppers, avocados, and green tomatoes, as well as declines in LP gas prices.

On an annual basis, headline inflation eased to 3.10% in 1H July, edging closer to Banxico's 3% target, falling to its lowest level since 2H December 2020. Core inflation was unchanged at 3.95%. Tradable inflation edged up to 3.52% (from 3.45%), while services inflation declined to 4.36% (from 4.40%). On a three-month seasonally adjusted annualized basis (3m SAAR), core inflation moderated to 3.35% in 1H July, with tradables at 2.31% and services at 4.24%. Within services, housing and other services were key drivers of the recent improvement, helping bring underlying inflation closer to levels consistent with Banxico's target.

Our take: The release reinforces the ongoing disinflation process, with goods prices continuing to benefit from the peso's strength. At the same time, the moderation in other services inflation appears to be driven by temporary factors rather than signaling a sustained improvement in underlying price pressures. We continue to forecast year-end inflation at 4.1%, although weather-related shocks associated with El Niño could pose upside risks in the final months of the year. On monetary policy, we expect Banxico to keep the policy rate unchanged at 6.5% on August 6, maintaining a cautious tone. Recent inflation readings are unlikely to materially alter the Board's near-term assessment, particularly given persistent uncertainty surrounding services inflation. That said, a favorable external backdrop, weak economic activity, a relatively stable USDMXN, core inflation moving closer to target, and tentative signs of easing price pressures in services could eventually strengthen the case for renewed policy easing later this year.

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