Mexico's inflation slips further on food prices even as core inflation strengthens

Mexico's inflation slipped below 3.0% (Banxico's target) in May for the first time in a decade and continued to fall since then, as core inflation remained at its lowest level ever at 2.3% and food inflation fell. Core inflation eventually recovered marginally to 2.38% in September and it is believed that it could rise further, although a substantial acceleration will not come before early next year. However, non-core inflation fell further led by the lowest food inflation in 17 months. 

Given the weakness in food prices, it is estimated that inflation likely fell further through mid-October to 2.48% yoy. While core inflation has bottomed out, food (and to some extent transport) inflation remains the key downside risk to near-term inflation numbers. Headline inflation has slipped significantly below Banxico's 3.0% target post the sharp decline in January due to low inflation in the housing segment, the key component of core inflation. 

"We expect inflation to rise only modestly over the next 12 months and have therefore cut our 2015 inflation forecast to 2.9% from 3.2%, but we have raised our 2016 inflation forecast to 3.5% from 3.4%", says Societe Generale.

Inflation is expected to revert to its medium-term trend in 2016 when the base effect of lower telecom and energy prices ebbs. 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.