Mexico's inflation continues to fall at moderate pace

Mexico's inflation slipped below 3.0% (Banxico's target) in May for the first time in a decade and continued to fall over the following three months, as core inflation remained at its lowest level ever at 2.3% and food inflation fell. While core inflation has bottomed out, food (and to some extent transport) inflation remains the key downside risk to near-term inflation numbers.

Moreover, it is difficult to factor in a significant rise in core prices in the near term (although they should recover in 2016 from this year's lows) given the low wage pressure and substantial output gap. Finally, MXN pass-through remains too low to push up inflation significantly. For September, the monthly series is expected to print at 2.49% yoy (0.35% mom) and the bi-weekly series to fall further to 2.46% yoy (-0.05%mom). 

Headline inflation has slipped significantly below Banxico's 3.0% target post the sharp decline in January due to low inflation in the housing segment, the key component of core inflation. Given these developments, and the slightly weaker-than-expected growth environment, analysts do not see anything that could seriously disturb the status quo. 

"We expect inflation to rise only modestly over the next 12 months and have therefore cut our 2015 inflation forecast to 2.9% from 3.2%, but we have raised our 2016 inflation forecast to 3.5% from 3.4%", says Societe Generale. 

Inflation is likely to revert to its medium-term trend in 2016 when the base effect of lower telecom and energy prices ebbs. Essentially, the inflation situation remains conducive to Banxico's current accommodative stance, and growth and the Fed's stance are likely to be key factors in monetary policy decisions over the next couple of quarters, added SocGen.