Mexico’s mid-February CPI rises surprisingly, inflation likely to remain on target for long time

Mexico's mid-February CPI rose 0.29% 2w/2w on additional price increases in prices of perishable good that rose 2.08% 2w/2w. Core inflation accelerated on par with expectations. Core other goods prices rose 0.57% 2w/2w, reflecting some impact of the depreciation of peso. Meanwhile, services inflation remained subdued (0.09%).

"We expect monthly inflation to reach 0.49% m/m in February, but this figure is still in line with our year-end forecast of 2.9% y/y", says Barclays.

Additional price increases in perishable food was the main reason for the CPI's unexpected print of 0.29%, as compared with the expected 0.11%. The rise in perishables food prices usually reverses later in the year. Depreciation of FX is definitely accelerating inflation, given that the core goods inflation accelerated to 2.9% in February 2016 from 2.5% in January 2015. Services inflation continued to be at 2.4% in the same period.

The Banxico's move last week to hike rate by 50bp is still being digested, as inflation continues to be at target and relative prices are adjusting in an orderly manner. The rate rise is expected to be one-off and rather symbolic. Meanwhile, the monetary policy should continue to move together with the US Fed as inflation is expected to remain on target for a long period. The labor markets are still expected to be in a delicate condition, while risks are balanced. The Bank of Mexico is expected to next raise its interest rate in June.