Mexico inflation to remain below Banxico’s target this year

Mexico inflation slipped below 3.0% (Banxico's target) in May for the first time in a decade and has continued to fall since then, with core inflation remaining very low, food inflation at its lowest in 17 months, and transport inflation down to less than half of what it was at the end of 2014. For October, the monthly series is expected to print at 2.47% yoy (0.50% mom) and the bi-weekly series to stay unchanged at 2.47% yoy (0.09% change from mid-October levels). 

The weakness in Mexican consumer prices is mostly due to the effects of lower telecom and other prices in the housing segment, which together helped inflation decline by nearly 1% in January this year from its end-2014 level. This effect is expected to end in January 2016, when inflation will likely surge above 3.2%. However, despite the likelihood of a rebound in January, it is difficult to factor in a significant rise in core prices in the near term given the low wage pressure and still substantial output gap. 

Finally, MXN pass-through remains too low to push up inflation significantly. As a result, inflation is expected to rise only modestly over the next 12 months. Essentially, the inflation situation remains conducive to Banxico's current accommodative stance, and growth and the Fed's stance are likely to be key factors in monetary policy decisions over the next couple of quarters.