Mexico’s headline inflation likely to have accelerated in mid-June

Mexico’s headline inflation is likely to have accelerated in mid-June. As the Mexcian peso continues to be under pressure because of several external factors, inflation is seen accelerating throughout 2016. Inflation rate is expected to have risen to 2.72 percent year-on-year, whereas core inflation is likely to have accelerated 0.16 percent in mid-June, said Societe Generale in a research report. Core inflation is expected to accelerate more than the Bank of Mexico’s target in June.

Inflation in Mexico has risen in the past two months after slowing in February and March. It rose in spite of transport inflation turning negative and dwelling inflation remaining low. Acceleration in core inflation as well as higher food inflation has added to rise in headline inflation in 2016. The ongoing rise in core inflation without any significant increase in dwelling inflation indicates the lagged effect of MXN’s decline, according to Societe Generale.

Below-target inflation, in spite of significant currency decline, signals at a larger output gap than estimated currently. This implies there is a possibility that the slack in labor market is more than what is shown by the official unemployment statistics.

The decline in the Mexican peso has been unsuccessful in forming considerable second-order impacts. The probability of a lagged pass-through impact from depreciation of the peso continues to pose as the upside risk to the 2016 inflation outlook. Meanwhile, lower energy prices, below-expected growth and labor market slack pose downside risks to the inflation outlook.