Mexican inflation seen accelerating in H2, currently remains flat on low energy prices

Mexico’s inflation is likely to accelerate; however, at present it continues to be flat due to low energy and dwelling prices. The full-month July inflation had come in at 2.65 percent year-on-year, surprising on the downside, following an upside surprise in the bi-weekly release for that month. The rise in bi-weekly inflation in July was mainly because of the rose in non-core government approved energy prices.

But, as the full month release indicates, headline inflation continues to be largely influenced by low inflation in dwelling and transport in 2016, while inflation in other considerable component such as beverages, food and tobacco, reached its lowest levels in 2016. As food inflation is dropping, there is likelihood that the full-year inflation would be slightly lower than anticipated currently, stated Societe Generale in a research report.

“For mid-month August, we see a modest rise in inflation to 2.66 percent yoy, while the readings for the core components are likely to be consistent with core inflation rising slightly above 3 percent yoy”, added Societe Generale.

Inflation in Mexico is expected to continue accelerating in the second half of 2016, partially because of the normalization in components such as transportation and dwelling, and partially due to lagged impact of currency depreciation. But there is a growing likelihood since the release of July’s data that the average fourth quarter inflation would come in below the estimated 3.5 percent year-on-year, said Societe Generale.

On the upside, if the demand growth continues to be solid, a weaker peso might result in inflation to rise at a faster pace than expected. As inflation expectations have continued to accelerate amidst low actual inflation implies that the downside risks in the near term is matched by a bit higher inflation in the medium term, according to Societe Generale.

“Nevertheless, falling food inflation, together with low dwelling inflation, should help keep inflation stable in the medium term (SG: 3.4 percent for 2017)”, noted Societe Generale.