Mexico: Inflation eases from 16-year high in January
February 8, 2018
Consumer prices rose 0.53% from the previous month in January, which was a tad above market analysts’ projections of a 0.50% increase and followed the 0.59% rise recorded in December. The slightly stronger-than-expected figure largely reflected higher energy prices due to a pick-up in gasoline prices, and an unexpected leap in government-regulated tariffs. Conversely, pass-through effects from a weakened peso remained relatively contained in January, with broadly stable prices for services offsetting increases in the prices for tradable goods, particularly processed food.
Inflation eased markedly from December’s 16-year high of 6.8% to 5.5% in January, marking the softest figure since last March. Behind the moderation in January’s print was a strong base effect caused by a sharp one-off increase in gasoline prices in January 2017. Agricultural inflation prevented a sharper deceleration in the headline figure as it accelerated from the previous month in January. That said, a base effect should cause agricultural price pressures to moderate in upcoming months.
The closely monitored core consumer price index—which excludes volatile categories such as fresh food and energy—rose 0.28% in January from the previous month, well below the 0.42% increase recorded in December. Core inflation slowed from 4.9% in December to 4.6% in January, a 10-month low. Core goods inflation led the way, as it eased to 5.8% in January from 6.2% in December, while core services inflation eased three-tenths of a percentage point, to 3.5%.
The deceleration in both headline and core inflation spells good news for policymakers and reaffirms our panelists’ projections that inflation should fall below the upper limit of Banxico’s inflation target of 3.0% plus or minus 1.0% by the end of the year. Indeed, a base effect in both core and non-core prices, softer domestic demand and tighter monetary conditions should all push inflation down in upcoming months.
Nonetheless, the balance of risks to our panel’s scenario remains tilted to the downside; the peso is likely to navigate choppy waters ahead of further NAFTA talks and the July presidential election. In addition, rising concerns that inflation may be taking hold in the U.S. could cause the Fed to turn more hawkish and force further monetary tightening in Mexico, throwing a wrench in the works of an already beleaguered economy.
Mexico Inflation Forecast
In its November inflation report, the Central Bank stated that inflation will remain above its 3.0% target this year but should gradually converge to the target towards the end of 2018. Panelists surveyed by FocusEconomics this month expect inflation to end 2018 at 3.8%, which is up 0.1 percentage points from last month’s forecast. For 2019, the panel sees year-end inflation at 3.4%.
Author: David Ampudia, Economist