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Lower volatile agricultural prices were the main downside pressure

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.


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Julio Ruiz