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Lower volatile agricultural prices were the main downside pressure
24/10/2023



Headline CPI increased 0.24% bw/bw in 1H October, below market consensus of 0.33% (as per Bloomberg) and our forecast of 0.31%.  Downside pressure in headline inflation is explained mainly by the fall in volatile agricultural prices (-1.72%), which mitigated the reversal of the seasonal subsidy to electricity tariffs. On the other hand, core bi-weekly inflation, which stood also at 0.24%, was above market expectations (0.19%) and our forecast (0.17%). Services inflation (0.27% bw/bw in 1H October versus 10-year median of 0.16%) was the main upward driver to core inflation. Annual headline and core inflation fell further to 4.27% in 1H October (from 4.47% in 2H September) and 5.54% (from 5.74%), respectively. Core services annual inflation also eased to 5.33% in 1H October (from 5.37% in 2H September), but at a slower pace than core goods inflation (5.72%, from 6.04%). At the margin, assuming bi-weekly inflation in line with the five-year median in the second half of October, the seasonally adjusted three-month annualized headline inflation stood at 5.69% in October (from 5.79% in September), while core inflation stood at 4.44% (from 4.31%), pressured by services inflation (5.88%, from 5.64%).

 

Our take: Our 2023 yearend inflation forecast still stands at 4.6%. In our view, the central bank will start its monetary easing cycle with a 25-bp rate cut in 1Q24 given persistence in services inflation (likely driven by tightness in activity), an expansionary fiscal stance next year and a cautious Banxico board regarding the disinflationary outlook. However, we would not be surprised if it is postponed beyond 1Q24, depending on the evolution of the inflation outlook and its determinants.

 

See detailed data below


Julio Ruiz