Mexico CPI increased 0.37% m/m in September

Mexico CPI increased 0.37% m/m in September. This was the result of no inflation observed in the second half of the month (consensus: 0.42%), due to unexpected price reductions in perishables. However, core inflation increased 0.37% m/m, slightly higher than expected (consensus: 0.36%), as a result of a relative strong increase in core food goods in the second half of the month (0.19% 2w/2w), partially offset by almost zero inflation in services (0.03% 2w/2w). In annual terms, inflation declined to 2.5% from 2.6% in August, with core inflation accelerating to 2.4% y/y (from 2.3%).

It is believed that core will continue inching up to 2.7% in December as some FX pass-through continues taking place. However, services inflation will likely stay very close to 2.2%, ruling out a contamination from this source to non-tradable prices. 

Inflation dynamics have been positive amid the FX depreciation. In particular, the FX pass-through has been limited to some durables prices, suggesting that this is not a generalized and persistent phenomenon. Core inflation might slightly pick up towards the beginning of 2016, basically due to an expected acceleration of core inflation in Q4 15. This performance should be short-lived, and core inflation will likely hover around 3% for the rest of 2016. Finally, some positive shocks are expected to continue to affect CPI, as additional reductions on mobile tariffs and lower gasoline prices are expected in January.

The economy has been decelerating in H2 15, driven by a slowdown in the services activities. Aggregate demand should gradually recover during 2016, while the output gap will likely remain on negative terrain. In terms of the labor market, the unemployment rate should reach pre-crisis levels by the end of 2016, with real wages improving slowly. 

It is clear from the minutes of the last meeting that the board considers that the first adjustment should be on the fiscal side, curbing pressures in the rates market, since the fiscal deficit has increased in the past two years. Although the reduction of the deficit will likely be gradual, it includes an important reduction in capital spending, while the tax burden has increased (tax revenues at 13.6% of GDP in 2015, 5.2pp higher than in 2012). Accordingly, fiscal conditions in Mexico is expected to remain tight in the coming quarters, and monetary policy should be adjusted later.