Inflation continues to slip after falling below Banxico target in May

Inflation slipped below 3.0% (the Banxico's target) in May for the first time in a decade and has declined even further since then, as core inflation remained at its lowest level ever at 2.3% and food inflation fell to its lowest levels in 16 months. The key component of core inflation - dwellings - remains the single most important factor keeping inflation below target. Also, it is difficult to factor in a significant rise in core prices in the next few months given the low wage pressure and the substantial output gap while MXN passthrough remains low. 

"We expect the bi-weekly series for mid-September to report annual inflation at 2.48% yoy. Following recent developments, we have revised down our 2015 inflation forecast to 2.9% from 3.2% even though we have raised our 2016 inflation forecast to 3.5% from 3.4% (the year-ahead inflation expectations are consistent with this view)", notes Societe Generale. 

Inflation is expected to revert to its medium-term trend in 2016 when the base effect of lower telecom and energy prices ebb. Broadly, the inflation situation remains conducive to Banxico's current accommodative stance, and economic growth and the Fed's policy stance are likely to be the key factors in monetary policy decisions in the near term.