Mexico’s bi-weekly September inflation likely to have accelerated slightly

Mexican inflation continues to surprise on downside. August inflation report had three important takeaways. Firstly, the entire inflation acceleration in August and in July was because of the increase in government-approved energy prices. Secondly, two key components – dwelling and food – with the combined weight of more than half of CPI, both were a drag on inflation. And lastly, there was no considerable inflation acceleration in components that are connected closely with the peso passthrough, noted Societe Generale in a research note.

The combined impact of all  these implies that the downside surprise in the bi-weekly and month inflation figures would continue in September even while the biweekly inflation is expected to possibly accelerate slightly to 2.7 percent year-on-year and 0.36 percent sequentially, stated Societe Generale. Moreover, core inflation is expected to have stabilized close to the Bank of Mexico’s target. But given the subdued inflation in the dwelling component, it is less likely that core inflation might further accelerate in the next couple of months.

Inflation releases have usually surprised on the downside in 2016. Headline inflation continues to be largely influenced by subdued dwelling and transport inflation, while food inflation continues to be low. This suggests that average full-year inflation would be lower than the Bank of Mexico’s target range, stated Societe Generale.

However, inflation is expected to accelerate in 2017, partially because of normalization in components such as dwelling and transportation and partially as a lagged impact of current depreciation. Furthermore, a weaker currency might lead to inflation accelerating a more rapid pace than anticipated unless the labor market deteriorates. As inflation projections have continued to increase in midst of low actual inflation, it implies that the downside risk in the near term is matched by a slightly higher inflation in the medium term.

“We expect inflation to average 3.4% in 2017. Core inflation will likely remain stable around or slightly above Banxico’s target”, added Societe Generale.