The jump in Mexico’s headline inflation, to 4.7% y/y in March, was driven once again by higher fuel inflation. We think this trend has a bit further to run, but the central bank is likely to look through this and keep its policy rate at 4.00% over the coming months.
Banxico likely to look through surging inflation
- The jump in Mexico’s headline inflation, to 4.7% y/y in March, was driven once again by higher fuel inflation. We think this trend has a bit further to run, but the central bank is likely to look through this and keep its policy rate at 4.00% over the coming months.
- The sharp rise in inflation from 3.8% y/y in February to 4.7% last month was in line with the Bloomberg consensus expectation. This reading was well above Banxico’s 2-4% target range and marks the highest rate of inflation since December 2018. (See Chart 1.)
- The breakdown showed a chunky rise in fuel inflation. This pushed up inflation in the transport and housing categories. That can be explained in large part by unfavourable base effects linked to the slump in oil prices in March 2020. There was also a broader rise in price pressures which lifted core inflation to 4.1% y/y. In particular, airline fares surged by 22.1% m/m as restrictions were eased in Mexico last month. Inflation in other categories including clothing as well as food and beverages also increased. (See Table 1.)
- The rise in headline inflation has a bit further to run. Base effects will probably continue to push up fuel inflation in April, and we expect that the headline rate will rise to around 5.5% y/y. But this impact should unwind over the rest of Q2 and Q3. What’s more, we think that core inflation may edge lower in the coming months as food inflation (some of which is included in the core CPI basket) drops back.
- Overall, rising inflation has put an end to Banxico’s easing cycle, but we don’t expect a shift to rate hikes anytime soon. At the last meeting, the central bank noted that base effects will cause inflation to rise, suggesting it will look through this impact. And with inflation set to trend lower later this year; Mexico’s output gap likely to remain wide; and the Fed set to remain dovish, we think that Banxico’s policy rate will stay at 4.00% over the coming quarters.
Chart 1: Mexico Consumer Prices (% y/y)
Sources: INEGI, Capital Economics
Table 1: Mexico Consumer Prices (% y/y)
Food & Bev.
Educ. & Rec.
Sources: Refinitiv, INEGI
Nikhil Sanghani, Latin America Economist, firstname.lastname@example.org