Itaú BBA - MEXICO – Transitory inflation rebound

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MEXICO – Transitory inflation rebound

Janeiro 23, 2020

Inflation was pressured by an unfavorable base effect and an update in excise tax

Bi-weekly inflation in 1H of January was pressured mainly by cigarettes (associated to an update in excise tax) and non-core agro prices.  Mexico’s CPI posted a bi-weekly rate of 0.27% in the first half of January (from 0.11% a year ago), below our forecast of 0.34% and above market expectations of 0.25% (as per Bloomberg). In turn, core inflation stood at  0.20% (from 0.08% a year ago). The inflation figure was pressured mainly by prices of cigarettes (bi-weekly rate of 7.64%) and some non-core agro products (tomato: 7.27% and green tomato: 20.90%). 

On an annual basis, headline and core inflation were also pressured by an unfavorable base effect. Headline CPI stood at 3.18% year-over-year in 1H January (from 3.02% the 2H December), while core prices accelerated to 3.73% (from 3.60%). Looking at breakdown, core goods inflation accelerated to 3.87% year-over-year in 1H January (from 3.56%), while core services inflation slowed down to 3.56% (from 3.64%). We note that annual inflation figures reflect also a transitory rebound due to an unfavorable base effect, as lower VAT in the northern frontier in January 2019 (the tax rate was lowered from 16% to 8%) put substantial downward pressure on inflation during the first two months of 2019. In turn, annual non-core prices expanded 1.60% year-over-year (from 1.33% in 2H of December).

At the margin, headline and core inflation also accelerated. Assuming bi-weekly inflation in line with the 5-year median variation in the second half of January, the seasonally-adjusted three-month annualized inflation stood at 4.07% in January (from 3.97% in December), while core inflation accelerated to 3.59% (from 3.44%).

We expect inflation to end 2020 at 3.1%. Rebound in annual inflation, which is expected to be reflected during the first two months of year, should be transitory and was already expected in Banxico’s inflation forecast path. Looking forward, we expect the widening of slack conditions and stable exchange rate to exert downward pressure on inflation, supporting gradual rate reductions.  However, persistence in core inflation and inflationary risks associated with domestic policies (minimum wage hike) stand in the way of a bolder policy response and will probably lead the central bank to space the cycle with pauses at some point this year.

Julio Ruiz

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