Itaú BBA - MEXICO – Inflation falls further, but still gradual deceleration of core

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MEXICO – Inflation falls further, but still gradual deceleration of core

Janeiro 9, 2020

Persistence in core inflation stand in the way of a more frontloaded easing cycle

Monthly CPI for November was above market expectations. Consumer prices increased 0.56% month-over-month in December (from 0.70% a year ago), slightly above our forecast of 0.53% and above market expectations of 0.51% (as per Bloomberg).  In turn, core inflation stood at 0.41% (from 0.47% a year ago). We note that core inflation was pressured by a seasonal effect impacting tourism prices (11.42%) and airfares (25.98%). In turn, non-core inflation (1.00%) was pressured by prices for fruits and vegetables, which increased 3.36%.

On an annual basis, non-core inflation helped headline inflation to decelerate further, while core inflation slowed down slightly. Headline inflation stood at 2.83% year-over-year in December (from 2.97% in November), the second month in a row below Banxico’s inflation target of 3%. Looking at the breakdown, core prices decelerated still gradually to 3.59% in December (from 3.65% in November), with tradables and services inflation slowing down to 3.56% (from 3.63%) and 3.64% (from 3.67%). A cleaner indicator for prices driven by domestic demand (core services excluding telecom, tourism related services and airfares) stood broadly unchanged at 3.80% in December. Looking at the 2H of December inflation figure, we note that core inflation remained almost unchanged (3.60%, from 3.59% in 1H of December). Meanwhile, annual non-core inflation fell further (0.59% in December, from 0.98% in November).

At the margin, core inflation decelerated at a faster pace. Using seasonally adjusted three-month annualized figures, headline inflation stood at 3.84% in December (from 3.47% in November), while core index decelerated further, to 3.21% (from 3.41%). The diffusion index, which tracks the percentage of items in the CPI basket with annual inflation higher or equal to four, fell slightly to 42.5% (from 42.8% in November). 

We expect inflation to end 2020 at 3.1%. Further deceleration in headline inflation, which has been dragged mainly by a fall in non-core inflation,  contributes for Banxico to continue easing its monetary policy, amid weak economic activity. However, the persistence in core inflation stand in the way of a more frontloaded easing cycle.
 

Julio Ruiz



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