Itaú BBA - MEXICO – Headline inflation rises beyond expectations, with core inflation slowing down

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MEXICO – Headline inflation rises beyond expectations, with core inflation slowing down

Março 9, 2020

Annual inflation rebound will fade away in March as the unfavorable base effect disappears

CPI for February surprised to the upside, while core inflation was broadly in line with market expectations. Consumer prices increased 0.42% month-over-month in February (from -0.03% a year ago), above our forecast of 0.30% and market expectations (as per Bloomberg). In turn, core CPI stood at 0.36% month-over month (from 0.43% a year ago), close to our forecast of 0.38% and market expectations of 0.37%. Headline inflation upside surprise was driven mainly by non-core fruits and vegetables inflation.

Annual headline inflation accelerated, while core inflation slowed down. Headline inflation stood at 3.70% year-over-year in February (from 3.24% in January), pressured by an unfavorable base effect (lower monthly inflation in first two months of 2019 due to lower VAT in northern frontier) and non-core fruits and vegetables prices (11.2% year-over-year in February, from -1.76% in January). In contrast, core inflation decelerated slightly to 3.66% year-over-year in February (from 3.73% in January), with tradables and services inflation slowing down to 3.82% (from 3.92%) and 3.48% (from 3.51%), respectively. We note other core services CPI, an indicator closely related to domestic demand, decelerated to 3.72% (from 3.78%).  

At the margin, core inflation decelerated further. Using seasonally adjusted three-month annualized figures, headline inflation stood at 3.94% in February (from 3.87% in January), while core CPI slowed down to 3.34% (from 3.59%). The diffusion index, which tracks the percentage of items in the CPI basket with annual inflation higher or equal to four, was broadly unchanged at 40.8% in February.  

We expect inflation for 2020 at 3.2%. We note the rebound in annual inflation will fade away in March as the unfavorable base effect disappears. Looking further ahead, a widening output gap will likely contribute to curb inflationary pressures.


Julio Ruiz

 



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