Mexico’s headline inflation remains subdued, core inflation to reach central bank’s target in Q2

In the past few months, Mexico’s headline inflation decelerated after rising early in 2016, in spite of slow but stable rise in core inflation. Meanwhile, core inflation has been weighed on by dwelling inflation. However, most of the factors are expected to have bottomed out, said Societe Generale in a research report. Stronger inflation in dwelling and stabilization of transport inflation are likely to assist in recovering the overall inflation the next few months.

In the past two to three months, inflation expectations have become stable after falling continuously since August 2015. This will help inflation in reaching Bank of Mexico’s target rate in the coming few months, whereas core inflation is expected to reach the target rate in the second quarter, according to Societe Generale.

“Despite the rising possibility of a significant downward revision to our 2016 inflation forecast of 3.4%, we continue to hold the view that inflation this year will be higher than Banxico’s target (3.0%), and that it will continue to accelerate through this year”, noted Societe Generale.

Even if the probability of a lagged pass-through impact from the depreciation of the Mexican peso continues to be an upside risk to the outlook of 2016 inflation, below expected economic growth, labor market stagnation and lower energy prices pose downside risks.