Mexico’s inflation likely accelerated to 2.78 pct in August

The bi-weekly inflation in August in Mexico rose two ticks to 2.79 percent mainly due to the increase in non-core government approved energy prices that were raised in July and August. In all, non-core inflation, thus, rose 2.26 percent year-on-year in mid-August from 1.44 percent year-on-year in the final two weeks of July. In the meantime, core inflation appears to have stabilized at slightly lower than 3 percent in recent months, said Societe Generale in a research note.

“For August, we expect the full-month series to show headline inflation at 2.78 percent yoy, the highest level in six months, despite bi-weekly inflation remaining nearly flat at 2.77 percent yoy as against 2.80 percent in 1H August”, added Societe Generale.

Inflation releases in 2015 gave usually surprised on the downside with exception of the bi-weekly release for August. The recent rise implies that inflation is nearing the Bank of Mexico’s target level. Keeping the uptick aside, headline inflation is greatly influenced by low dwelling and transport inflation, while food inflation continues to be low. This suggests that average full-year inflation would come in lower than the central bank’s target, stated Societe Generale.

However, inflation is expected to accelerate, partially because of normalization in components such as dwelling and transportation and partially as a lagged impact of currency depreciation. Furthermore, a weaker currency might lead to inflation accelerating at a more rapid rate than projected unless the labor market deteriorates. The continued rise inflation expectations amid low actual inflation imply that the downside risk in the near term is matched by a bit higher inflation in the medium term.

“We expect inflation to average 3.4 percent in 2017. Core inflation will likely remain stable around or slightly above Banxico’s target”, noted Societe Generale.