Mexico inflation up for 2nd straight month

Thursday, August 9, 2018

Having fallen sharply in the first half of the year, Mexico's inflation has risen for two consecutive months, coming in at 0.54% month-on-month in July.

With the result, 12-month inflation hit 4.81% vs. 4.65% in June, well above the central bank target range of 2-4%.

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Nevertheless, analysts expected the latest uptick and there continues to be general agreement that the central bank will again uphold the benchmark rate at 7.75% at its next meeting (Oct. 4).

"We continue to believe that the annual rate will continue to be above 4.6% over the coming months, then converging towards the end of the year on our 4.3% annual [projection]," said Banorte's analysis team in a note.

A Citibanamex poll of 23 commercial banks released Tuesday produced a median estimate of 0.53%, and annual core inflation remains little changed in June, coming to 3.63% from 3.62% with a 0.29% m-o-m increase (just below estimates).

State statistics agency Inegi reported that prices in its energy basket were up 1.30% m-o-m for an annual increase of 17.63%. Rising oil prices and normalization of fuel prices in Mexico was the primary driver behind last year's record inflation, and though annual CPI fell sharply at the start of the year, they have resumed inflationary pressure.

In a note released after the announcement, Citibanamex noted that most of the increase in CPI stemmed from non-core sources and reiterated its forecast of 4.2% year-end annual inflation. It added that energy prices could well continue to be elevated in the coming months, but they do not see this causing secondary inflationary effects, adding that annual inflation likely peaked in August.

"Energy inflation should drop back as fuel prices (in peso terms) decline. What's more, the rally in peso - which is up by 12% against the dollar since its peak in June - should lead to a more general decline in price pressures," Latin America economist Edward Glossop of research firm Capital Economics said in a note.

On monetary policy, in the same Citibanamex survey only four of 23 banks saw an additional rate hike this year, with the median seeing the next move a 25-basis-point rate cut in April 2019.

"Banxico is unlikely to be spooked by the recent rise in inflation. For a start, it should be temporary," said Glossop. "Admittedly, the headline rate is likely to remain elevated in the near term, in part due to unfavorable base effects. But it should then resume its decline towards the end of this year and into next year."