Mexico's headline inflation likely to have accelerated in May

Mexico’s headline inflation is expected to have accelerated marginally last month on stronger core prices. In the recent months, Mexico’s inflation has decelerated after rising in early 2016. The headline inflation has been mainly weighed on by low transport inflation, amongst non-core factors, in 2016. Meanwhile, the core inflation has been weighed on by housing inflation. However, most of the factors are expected to have bottomed out, said Societe Generale in a research report.

“In May, we expect inflation to inch up to 2.58 percent yoy (2.63 percent yoy for the bi-weekly reading),” added Societe Generale.

In the coming few months, the overall inflation is likely to be recovered by firmer inflation in housing and stability in transport inflation. In the last two tor three months, inflation expectations have stabilized after the constant drop since August 2015.

This will help the headline inflation meet the Bank of Mexico’s target rate in the coming months, whereas core inflation is expected to meet the target rate in the second quarter. Moreover, inflation is expected to accelerate through the second half of this year. It is likely to be more than Bank of Mexico’s target rate of three percent by the end of 2016, according to Societe Generale.

The below-target inflation this year signals at a higher output gap than estimated. This implies that the sluggishness in the labor market is possibly higher that the official unemployment statistics showed. The lagged-pass through effect from the peso’s depreciation continues to be an upside risk to this year’s inflation outlook; however, lower energy prices, subdued growth and slack in labor market pose downside risks to inflation.