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Odds of Banxico pausing in May increased

CPI posted a bi-weekly rate of -0.16% in the first half of April (from 0.16% a year ago and compared with a five-year median of -0.03%), broadly in line with our forecast of -0.17% and market consensus of -0.15% (as per Bloomberg).  Headline figure was aided mainly by non-core CPI (-1.22% versus 5-year median of -1.32%) explained by a seasonal subsidy to electricity tariffs, a fall in volatile fruits and vegetable prices and lower gas prices. In turn, core CPI posted a bi-weekly rate of 0.18% (below market consensus of 0.22% and our forecast of 0.27% and from 0.44% a year ago and 5-year median of 0.20%), with core food (0.31% versus 5-year median of 0.25%) and non-food goods  (0.32%, same as the 5-year median) prices cooling down, while services CPI stood at 0.03% (versus 5-year median of 0.06%) aided by a seasonal fall in tourism packages prices and airfares after easter holidays.


On an annual basis, headline and core inflation fell to 6.24% in 1H April (from 6.58% in 2H March) and 7.75% (from 8.03%), respectively.  Looking at core CPI breakdown, food (12.38%, from 12.69%) and non-food goods (6.73%, from 6.93%) inflation fell further, while services inflation fell to 5.42% (from 5.73%). Still, 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 77.3% in the first half of April.



At the margin, headline and core inflation also fell further. Assuming bi-weekly inflation in line with the five-year median variation in the second half of April, the seasonally adjusted three-month annualized headline inflation was 3.82% in April (from 4.42% in March), while core inflation stood at 5.64% (from 7.17%).



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 April to 6.19% (from 6.69% in 2H March). Inflation sub-indexes associated to supply shocks of energy commodity prices (7.80% in 1H April, from 8.18% 2H March) and currency (7.53%, from 7.90%) also fell, while sub-indexes associated to salary stood at 6.40% (from 6.34%).





Our end of year inflation forecast of 5.3% has a downward bias given a faster than expected slowdown in headline inflation, which in addition to the improved evolution of core CPI (including services CPI) increases the odds of Banxico pausing in the upcoming May meeting. Our base case is for a final 25-bp rate hike in May reaching a level of 11.50% (keeping that level until the end of the year).


Julio Ruiz