Mexico's January CPI rose 0.38%, owing to a strong non-core data of 1% 2w/2w in the second half of the month due to higher vegetables and fruits prices. Meanwhile, core inflation eased 0.14% 2w/2w, mainly due to services inflation of 0.2% 2w/2w. On an annual basis, inflation accelerated 2.6% in January from 2.1% in December, on par with Barclays' forecast of 2.9% y/y. However, there are risks to the upside due to the recent decline of the Mexican peso.
Mexico's services inflation continues to be at 2.5%, with housing inflation at 0.8% y/y and transport inflation at 2.3%. Core inflation has decelerated to 2.4% 3m/3m in January. The recent decline in peso is expected to increase this trend in the following months as certain durable goods might continue to adjust. However, as the labor market continues to remain in slack, a strong acceleration is unlikely. The labor market slack is likely to persist as the Mexican growth is still facing challenges.
The Mexican government is likely to resolve pressures seen in public finances, mainly in PEMEX. The US Fed is expected to raise rates only two times in 2016, in June and in September. The Bank of Mexico is expected to raise rates in June, after the US Fed hikes in the same month.
