Most of the weakness in Mexico’s inflation in past few months is connected to decelerating transport inflation; however, core inflation continues to be below expectations in spite of its stable rise since November 2015. Amongst core component, the continued softness in dwelling inflation is quite astounding given that the impact of lower telecom prices should have come to an end in early 2016, said Societe Generale.
“We expect headline inflation to have stayed unchanged in April at 2.60% yoy, though we project core inflation (SG: 2.80% yoy) to inch up to its strongest reading in 16 months”, noted Societe Generale.
On structural basis, inflation below target rate in 2016 signals at a larger gap in output than expected at the moment, according to Societe Generale. This also implies that the slack in the Mexican labor market is possibly higher than what is indicated by the official unemployment statistics. Moreover, the depreciation of Mexican peso was also unsuccessful in creating considerable pass-through effect.
There appears to be a significant downside risk to the annual inflation forecast of 3.4% for 2016, added Societe Generale. There is a chance that average inflation might come in below the Bank of Mexico’s target level in 2016 in spite of the economy expanding at trend pace, noted Societe Generale.
