Itaú BBA - MEXICO – Headline inflation falls sharply in the first half of April, while core inflation decelerat

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MEXICO – Headline inflation falls sharply in the first half of April, while core inflation decelerat

Abril 23, 2020

Inflation was dragged mainly by a fall in gasoline prices

Bi-weekly inflation in the first half of April was slightly below market expectations. Mexico’s CPI posted a bi-weekly rate of -0.72% in the first half of April (from -0.03% a year ago), slightly below our forecast of -0.65% and market expectations (as per Bloomberg). The figure was dragged mainly by non-core food and energy prices, which posted a contraction of 0.78% and 8.49%, respectively. Meanwhile, core inflation stood at 0.20% (from 0.40% a year ago), above market expectations (0.18%) and below our forecast of 0.24%. 

On an annual basis, headline inflation slowed down sharply, driven mainly by lower gasoline prices, while core inflation also decelerated. Headline CPI decelerated to 2.08% year-over-year in 1H April (from 2.79% in 2H March), pressured down mainly by non-core energy prices (-15.36%, from -10.26%), associated to a fall in gasoline prices. In turn, core inflation decelerated to 3.40% (from 3.60%), with tradables inflation accelerating to 4.02% (from 3.89%), while services decelerated sharply (2.74%, from 3.29%), driven mainly by other services (2.21%, from 3.36%) due to the fall in tourism services prices (-14.0%) and air fare fees (-28.46%) amid the coronavirus outbreak. Still, core services excluding tourism services and airfares decelerated to 3.25% (from 3.39%).

At the margin, prices contracted, while core inflation slowed down. Assuming bi-weekly inflation in line with the 5-year median variation in the second half of April, the seasonally-adjusted three-month annualized inflation stood at a negative 1.07% in April (from 2.49% in March), while core inflation decelerated to 2.80% (from 3.19%).

We now expect inflation to end 2020 at 2.9% (before we estimated inflation at 3.2%). We expect low energy prices and widening of slack conditions to put downward pressure to inflation, offsetting the effects of the exchange rate depreciation. Lower headline and core inflation will help Banxico to ease monetary policy further. We see the policy rate at 4.5% before the end of this year.  

Julio Ruiz

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