Mexico: Inflation Downtrend Has Begun

Mexico: Inflation Downtrend Has Begun

Nader Nazmi - Market Economics
Latam Macro Snapshot | 08 Nov 2012 15:52 |

Annual inflation fell from 4.77% in September to 4.60% in October (BNP Paribas: 4.64%). This is supportive of our view that inflation peaked in September and will fall towards our end-year 2012 projection of 4.04% in Q4 due to a more favourable base effect as well as lower food inflation.

Headline consumer prices rose by 0.51% m/m in October, less than our consensus-matching 0.55% call. Core prices rose by 0.29% m/m in October, down from 0.33% m/m in September. After declining 2.9% m/m in September, mobile-line phone rates fell by another 4.4% m/m in October (subtracting 0.05pp from the headline). This helped keep service inflation at 2.25% y/y, the same as in September. Core inflation improved to 3.57% y/y in October from 3.62% y/y in September.

In the final two weeks of October, consumer prices declined 0.03% bw/bw on a 0.30% bw/bw fall in non-core prices. The decline in non-core prices was a consequence of (1) a large drop in fruits and vegetable prices (-2.3% bw/bw), and (2) lower meat and egg prices (-0.50% bw/bw). Core prices increased by a moderate 0.05% bw/bw in H2 October.

Our view has long been that inflation would end 2012 above the 4.0% ceiling of Banxico’s 3.0%±1.0 pp implicit comfort zone. Despite this, and notwithstanding a positive output gap and above-trend growth, we do not interpret the recent communications by Banxico as an indication that a rate hike is imminent.

Given the downward risks to global growth, the Fed’s commitment to maintaining a highly accommodative stance for a long time and unprecedented expansionary policies adopted by other key central banks, Banxico will remain on hold until Q4 2013, in our view.

Highlights:

• Inflation in the merchandise segment of the core was 0.29% m/m. Prices for processed food items increased 0.36% m/m in October, and 0.22% bw/bw in the second half of the month. Non-food merchandise prices rose by 0.23% m/m in October (Table, next page).

• Non-core prices rose by 1.42% m/m in October mainly due to the seasonal unwinding of summer electricity subsidies, which increased energy prices by 3.58% m/m. Agricultural prices dropped 3.55% m/m, reflecting the fading of food supply shocks.

• The government kept regulated prices in check. These prices increased 0.05% bw/bw in H2 October (0.24% y/y).