Itaú BBA - MEXICO – Headline and core inflation fell by more than market expectations

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MEXICO – Headline and core inflation fell by more than market expectations

Dezembro 23, 2019

Headline inflation decelerated, helped by a slowdown in both core and non-core inflation

Inflation came in below market expectations. Mexico’s CPI posted a bi-weekly rate of 0.35% in the first half of December (from 0.56% a year ago), broadly in line with our forecast of 0.36% and below market expectations of 0.41% (as per Bloomberg). In turn, core inflation stood at  0.36% (from 0.42% a year ago). We note that core inflation was pressured by a seasonal effect impacting tourism prices (14.19%) and airfares (27.78%). 

On an annual basis, headline inflation decelerated, helped by a slowdown in both core and non-core inflation. Headline CPI stood at 2.63% year-over-year in 1H December (from 2.85% the 2H November), below Banxico’s inflation target. Core prices continued to decelerate gradually (3.59%, from 3.65%), with prices for goods slowing down slightly  (3.55%, from 3.58%), while prices for services decelerated to 3.63% (from 3.73%). In turn, annual non-core prices contracted 0.15% year-over-year (from +0.51% in 2H of November), dragged by food (-1.57%) and energy (-0.78%) prices.

At the margin, headline inflation is running higher, but core inflation continued to decelerate. Assuming bi-weekly inflation in line with the 5-year median variation in the second half of December, the seasonally-adjusted three-month annualized inflation stood at 3.51% in December (from 3.41% in November), while core inflation decelerated further, to 3.17% (from 3.40%).

The continued gradual deceleration of core inflation, amid weak economic activity, opens room for Banxico to continue easing monetary policy. While the voting of the most recent policy decision (only one board member backing a 50-bp rate cut, compared with two votes in the previous two meetings) suggests the central bank is unwilling to increase the pace of monetary policy easing, the poor activity figures combined with well-behaved core inflation ahead (despite the strong minimum wage increase announced recently, we believe inflationary pressures will be contained by the performance of the USDMXN, the widening output gap and favorable inertia created by low headline inflation) indicates to us pauses in the cycle are also unlikely in the near term.     
 

Julio Ruiz


 



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