Mexico CPI: Subdued inflation should keep the hawkish sentiment of Banxico

Mexico's CPI increased 0.09% 2w/2w in the first half of July as a result of incremental rises in fruit and vegetable prices, partially offset by a reduction in egg prices and a weak core print. Core inflation was 0.10% 2w/2w, due to higher-than-expected reductions in core other goods prices (-0.19% 2w/2w). Annual inflation decreased to 2.8% from 2.9% in the last fortnight of June.

"This report comes in line with our year-end forecast of 2.6%. Consensus year-end inflation is at 2.9%, according to the latest Banamex survey, and we believe the consensus will gradually incorporate this lower-than-expected print, coming closer to our forecast", says Barclays.

There is still no evidence of FX pass-through. Durable goods prices declined 0.23% 2w/2w, while during the same fortnight of 2014 they decreased 0.13%. This would suggest that there is still some weakness in the demand for these goods and room to accommodate additional pass-through.

If inflation remains under target during H2, Banxico will be facing a dilemma when the Fed ultimately decides to hike. So far, as the MXN has depreciated faster than market expectations, so the board might keep a neutral tone this July 30, highlighting the risks to inflation but acknowledging that the domestic conditions are supportive for keeping inflation under control, added Barclays.