Itaú BBA - MEXICO – CPI decelerated further, with annual core inflation falling slowly

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MEXICO – CPI decelerated further, with annual core inflation falling slowly

Dezembro 9, 2019

Slow core inflation deceleration reinforce a gradual monetary easing cycle for now

CPI for November was broadly in line with market expectations. Consumer prices increased 0.81% month-over-month in November (from 0.85% a year ago), slightly below our forecast of 0.83% and market expectations of 0.82% (as per Bloomberg). CPI figure was pressured by non-core CPI, which expanded 2.62% month-over-month, associated to the removal of the seasonal subsidy in power utility tariffs implemented during the summer, with the energy index at 3.18% (from 2.09% a year ago). In turn, monthly core inflation stood at 0.22% (from 0.25% a year ago).

On an annual basis, headline inflation decelerated further, while core inflation fell slightly. Headline inflation stood at 2.97% year-over-year in November (from 3.02% in October), crossing below Banxico’s inflation target of 3%. Looking at the breakdown, core inflation decelerated only slightly to 3.65% in November (from 3.68% in October), with tradables slowing down to 3.63% (from 3.78%), while services stood at 3.67% (from 3.58%). A cleaner indicator for prices driven by domestic demand (core services excluding telecom, tourism related services and airfares) stood broadly unchanged at 3.79% in November. Looking at the 2H of November figure, we note that core inflation remained almost unchanged (3.65%, from 3.66% in 1H of November), pressured mainly by services (3.73%, from 3.62%). 

At the margin, core inflation is falling more significantly. Using seasonally adjusted three-month annualized figures, headline inflation stood at 3.35% in Nov (from 2.01% in Oct), while core index reached 3.37% (from 3.51%). The diffusion index, which tracks the percentage of items in the CPI basket with annual inflation higher or equal to four, fell to 42.8% (from 45.2% in October). 

We expect inflation to end 2019 at 2.9%.  While headline inflation is at the target, core inflation, one of the concerns of the three board members that voted for a 25 bp cut in the last monetary policy decision (the rest of board members voted for a 50 bp cut), is still at uncomfortable levels on an annual basis, which reinforces another 25-bp rate cut this month. However, given weak economic growth and its likely effect on core inflation ahead, an acceleration of monetary policy easing pace is still possible at some point, especially if the USMCA is approved (a key risk-factor for the inflation outlook). 

Julio Ruiz

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