Mexico—Headline Inflation Surprised to the Downside in Early January

Headline and core inflation for the first two weeks of January increased by 0.15% 2w/2w and 0.25% 2w/2w, respectively, according to the central bank.  These results bring headline and core CPI to 6.35% y/y and 5.77% y/y, respectively.  Both readings are above Banxico’s inflation target range for the 1Q09 (5.25% to 5.75%).  The headline print was lower than our expectations of 0.22% 2w/2w (Bloomberg consensus 0.24% 2w/2w); however, core CPI came in close to our forecast of 0.24% 2w/2w (Bloomberg consensus 0.20% 2w/2w).


Non-core CPI decreased sharply compared to a year ago because of a faster decline of inflation in the agricultural as well as in the administered and concerted categories.  A sharp drop in prices of fruits and vegetables (-3.1% 2w/2w), in particular jitomate, drove agricultural inflation down.  Moreover, lower inflation in the administered component (-0.68% 2w/2w), especially lower electricity and domestic gas tariffs brought inflation in the administrative and concerted group to lower grounds. This is despite the higher prices in the concerted category (1.18% 2w/2w), chiefly the bus fares, as well as water and phone services.


Core CPI stayed stable compared to a year ago because higher inflation in the goods category (proxy for tradable CPI) was compensated by lower prices in the services sector (proxy for non-tradable CPI).  Indeed, higher prices of processed food (0.69% 2w/2w) and “others” (0.40% 2w/2w) impacted the goods inflation; however, lower costs in housing (0.1% 2w/2w) and education (0.09% 2w/w), coupled with a sharp decline in the “rest” sub-component (-0.20% 2w/2w), pressured services prices down.


Overall, the inflation outcome reflects the impact on prices from administrative measures, a contracting economy, and seasonal factors.  However, lower international prices of commodities are still to work its way in on domestic prices more forcefully once the currency stabilizes further.  Moving forward, the current inflation result and dynamics, along with deteriorated domestic and global conditions bode well with our view that inflation and inflation expectations will remain improving (3.7% y/y by year end 2009), thus inducing the central bank to continue lowering the reference rate aggressively to 5.5% to 6% during the 1H09.  However, we do not discard the possibility that further easing might be necessary, especially in the 2H09, if growth dynamics and expectations deteriorate further during that period.