Mexico Inflation Slows as Expected, Giving Some Relief to Banxico

Mexico’s annual inflation eased roughly in line with expectations in early August, a positive sign for the central bank as it continues holding its interest rate at a record high to slow price growth.

(Bloomberg) — Mexico’s annual inflation eased roughly in line with expectations in early August, a positive sign for the central bank as it continues holding its interest rate at a record high to slow price growth. 

Consumer prices rose 4.67% in the first half of the month compared to the same period a year earlier, down from 4.78% in late July, the national statistics institute reported Thursday. The result was roughly in line with the 4.66% median estimate of economists surveyed by Bloomberg, giving some relief to policymakers who kept borrowing costs at 11.25% in August for the third time in a row.

Core inflation, which excludes volatile items such as fuel and food, decelerated to 6.21% from 6.52%, remaining above the headline reading and the central bank’s target of 3% plus or minus 1 percentage point. The metric has been a persistent concern for the central bank, known as Banxico.

Mexico is facing seasonal inflationary pressures explained in part by vacation expenditures, though persistent domestic demand is also behind some of the more stubborn price rises. Higher salaries and steady growth have also bolstered willingness to spend. Those trends mark a change from the pandemic, when global supply shocks drove much of the cost-of-living increases.

“The good news is that core inflation had a more positive result, with a more pronounced deceleration than what had been expected,” said Janneth Quiroz Zamora, director of economic research at Monex Casa de Bolsa.

Early August price drivers included university and school costs, which are usually higher before classes start, as well as the prices of certain food items such as tomatoes and onions. Service price pressures, which include eating out at restaurants and lunch spots, remain a concern for economists. 

Last Bank

The central bank’s five-member board has been unified about the need to remain vigilant on prices, though minutes of their August meeting to be released later Thursday will provide more details about their discussion. Analysts in a recent Citi survey expect rates to fall in December. 

“Mexico’s headline inflation rate declined further in the first half of August, but sticky services inflation will remain a concern for the central bank,” Kimberley Sperrfechter, emerging markets economist at Capital Economics, wrote in a note. “This, alongside hawkish comments from officials, means that Banxico will be the last major central bank in the region to ease monetary policy.”

Policymakers have been more hawkish than counterparts in Latin America, including those in Chile and Brazil, who have already started to lower borrowing costs. Banxico Governor Victoria Rodriguez, who has provided little information about the possible dates when the bank might consider cuts, said that policymakers need to watch disinflation closely. 

Bi-weekly inflation reached a peak of 8.77% a year ago before taking on a near-steady descent to current levels. Mexico’s economy has performed better than expected, with the Finance Ministry predicting that growth would be above 3% this year. Analysts surveyed by Citi expect annual inflation will stand at 4.67% in December and 4% at the end of 2024. 

Some analysts think that the bank, when it does start to adjust monetary policy, could do so gradually. That could be the case even if it waits until next year to begin lowering borrowing costs, as some economists are predicting. 

“It’s possible that the Banco de Mexico would start by doing a few isolated adjustments, which would not imply a normalization cycle or constant cuts, but rather a few cautious cuts,” Quiroz Zamora said.

–With assistance from Rafael Gayol.

(Updates with economist comments and inflation drivers starting in fifth paragraph)

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