Itaú BBA - MEXICO – Headline and core inflation surprise to the upside in the first half of May

Macro Latam

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MEXICO – Headline and core inflation surprise to the upside in the first half of May

Maio 22, 2020

Headline inflation rebounded driven by core food and gasoline prices

Bi-weekly inflation in the first half of May was above market expectations. Mexico’s CPI posted a bi-weekly rate of 0.30% in the first half of May (from -0.30% a year ago), far above our forecast of -0.02% and market expectations of -0.01% (as per Bloomberg). The upside surprise came mainly from core inflation, which posted a biweekly rate of 0.24% (compared to our forecast of 0.17% and market expectations of 0.12%) due to a sharp increase in processed food prices (0.80%, from 0.20% a year ago and 5 year median). 

On an annual basis, headline and core inflation rebounded driven by core food and gasoline prices. Headline CPI increased 2.83% year-over-year in 1H April (from 2.21% in 2H April), with core inflation also accelerating to 3.76% (from 3.61%). Core inflation was pressured mainly by processed food prices (6.54%, from 5.91%), which was already increasing at a fast pace before the outbreak (4.63% in 2019) and is likely related to supply disruptions amid the outbreak and/or the pass-through of the currency depreciation to prices. In turn, core services inflation increased slightly to 3.02% (from 2.95%), pressured by an increase in airfare prices (a biweekly rate of 14.19%). However, core services excluding tourism services and airfares decelerated to 3.15% (from 3.24%). Non-core inflation also increased (-0.06%, from -2.00%) due to higher gasoline prices and non-core agro items.  

At the margin, headline and core inflation also rebounded. Assuming bi-weekly inflation in line with the 5-year median variation in the second half of May, the seasonally-adjusted three-month annualized inflation accelerated to 2.38% in May (from -0.85% in April), while core inflation stood at 4.31% (from 3.00%).

We expect inflation to end 2020 at 2.9%. The widening of slack conditions will likely curb inflation pressures, offsetting the effects of the exchange rate depreciation. In any case the stickiness of core inflation reduces the odds of Banxico accelerating the easing pace (cuts larger than 50-bps). At the same time, the recent improvement of financial conditions (including the appreciation of the Mexican peso and lower credit risk premiums for both the sovereign and Pemex debt) should leave the board comfortable in keeping a 50-bp rate cut pace per meeting.  

Julio Ruiz

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