MEXICO – Inflation relief in the 2H March due to food prices

Bi-weekly headline CPI for the second half of March was 0.14%, below the Bloomberg median of 0.25% and our estimate of 0.34%. In contrast, core CPI rose by 0.15%, below market expectations of 0.18% and closer to our estimate of 0.16%. Within the core component, tradables increased by 0.08% bi-weekly, with the food subcomponent rising by 0.04% and non-food increasing by 0.12%, driven by pressures from other services due to the Easter holiday and elevated jet fuel prices. Meanwhile, core services advanced by 0.21% bi-weekly, with housing and other categories increasing by 0.15% and 0.31%, respectively. Non-core CPI stood at 0.09%, following high pressures in the first half (1.96%), mainly driven by deflation in food prices, while energy and tariff inflation continued to rise (0.72%), primarily due to pressures from electricity following higher natural gas prices.

In annual terms, headline inflation was 4.59% in March, exceeding the upper bound of the inflation target's tolerance range and marking the highest level since October 2024. Core CPI was 4.45%, with tradables at 4.38% (slightly down from 4.55% in February) and services at 4.51% (slightly up from 4.45%). The core measure was unchanged: core CPI was at 4.7% on a 3MMA SAAR basis, with tradables at 5.0% and services at 4.5%. Within services, housing showed a slightly worse performance (3.8% vs. 3.4% in February).

Our take: Today’s report revealed a duality in the non-core component, with deflation in food prices following a significant increase in the first half of March, while energy prices continued to rise due to higher natural gas prices, despite fuel subsidies. Approximately 60% of Mexico’s natural gas demand is met by the US. Core inflation remained stable at the margin, despite some pressures in other services. Considering this data and the tone of the latest statement, we expect one additional rate cut, leading to a terminal rate of 6.5% in 2026, with rates likely to remain at that level through 2027. Today, Banxico will release minutes from the March 26 meeting, where the board cut the policy rate by 25 bps to 6.75% in a split decision. This should provide insight into the decision and board dynamics. The tone of the statement—highlighting that the rate cut is appropriate "on this occasion" and introducing the singular "an additional reference rate cut"—suggests that the rate-cutting cycle is nearing its end.

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