Inflation to stay near Banxico’s target despite possibility of modest acceleration

Essentially, headline inflation remains close to Banxico's target level of 3.0% post the sharp decline in January due to the elimination of long-distance telephone charges (which reduced housing inflation substantially and kept core inflation below 2.5%) and lower transport inflation. The one major category that has seen modest inflation acceleration over the past three months is health and personal care, while food inflation also ticked up in April. 

Societe Generale estimates, core inflation bottomed out in April eliminating some of the downside risk to the prices. That said, it's difficult to factor in a significant rise in core prices going forward given the low wage pressure and substantial output gap while MXN pass-through remains low. As a result, analysts do not see anything seriously disturbin g the status quo and expect inflation to rise only modestly to 3.17% yoy through mid-May following the seasonal decline in prices by -0.30 mom. Growth in aggregate demand will remain the key driver for both inflation expectations and monetary policy in the medium term.