Mexico’s inflation likely accelerated in February

Mexico's bi-weekly release implies that inflation in the country continued to rise in 2016 and is expected to have accelerated to 3.08% y/y in February. Inflation for the second-half of the month likely accelerated to 3.22% y/y. Both core and non-core items are expected to have witnessed accelerated inflation. However, food inflation was the key surprise in 2016. The acceleration of core inflation was consistent with expectations. Core inflation is likely to have risen 2.81% y/y in February.

In 2015, weakness in Mexican consumer prices was mainly because of the impact of lower energy, telecom and other prices in the housing segment. This helped inflation decelerate by almost 1% in January 2015. This impact is over now and the inflation is expected to accelerate more than central bank's target rate of 3% in February. Inflation should accelerate higher from Q2, partially as a reaction to the peso's depreciation and partly as the process of normalization of inflation.

"We expect average headline and core inflation of 3.4% and 3.3% respectively in 2016", says Societe Generale.

Continued inflation, growth and pressure on the Mexican peso should give the Bank of Mexico several reasons to continue to normalize policy rate in 2016; however, this will be limited by the extent of US Fed's tightening.