Mexico’s inflation likely to have stayed at 2.6 pct in June; expected to accelerate in H2

Mexico’s inflation is expected to have remained unchanged in June from May’s level. The nation’s headline inflation is expected to have remained at 2.6 percent year-on-year in spite of bi-weekly inflation accelerating to 2.65 percent year-on-year in the second half of June, said Societe Generale in a research report. Meanwhile, core inflation is expected to be quite close to Bank of Mexico’s target at 2.98 percent year-on-year.

In the past three months, inflation has been around the 2.5 percent-2.6 percent mark, marginally higher than the 2.1 percent seen at the end of last year. Inflation, as such, has remained below the Mexican central bank’s target level this year.

The subdued headline inflation is predominantly because of declining transport inflation, while in the core category, dwelling inflation has continued to remain low. But core inflation has continued to accelerate in 2016 in spite of low dwelling inflation, although at a moderate pace.

The persistent rise in core inflation indicates the effect of peso’s depreciation. With peso continuing to be under pressure because of a series of external factors, inflation is expected to accelerate in 2016. Structurally, below-target inflation signals at huge output gap that anticipated at the moment. This also implies that labor market slack is possibly greater than the official unemployment statistics shows.

The likelihood of a lagged pass-through effect from peso’s depreciation continues to be an upside risk to the fourth quarter’s and next year’s inflation outlook, added Societe Generale. Mexico’s inflation is expected to accelerate to 3.4 percent because of the sharp and sustained pressure on the MXN.