Mexico Annual Inflation Slows, Keeping New Interest Rate Cut in Play

Maya Averbuch and Maria Eloisa Capurro
·3-min read

(Bloomberg) -- Mexico’s annual inflation slowed roughly in line with expectations in August as a spike in food prices faded, giving the central bank more room to consider another interest rate cut this month.

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Consumer prices rose 4.99% from a year earlier, a touch below the 5.06% median estimate from analysts in a Bloomberg survey, the national statistics institute reported on Monday.

Core inflation, which excludes volatile items such as fuel, eased to 4%, at the top of the bank’s target range of 3% plus or minus one percentage point.

Mexico’s central bank, known as Banxico, is expected to mull its second-straight rate cut at its Sept. 26 decision. Food items, including tomatoes, onions, and lemons had caused an inflation spike in recent weeks after a period of drought was followed by heavy rains. Still, that didn’t stop policymakers from lowering borrowing costs in August as economic activity weakened.

“Banxico is on track to lower its policy rate,” Kimberley Sperrfechter, emerging markets economist at Capital Economics, wrote in a research note on Monday. She expects borrowing costs to drop by another quarter-point this month, as activity shows signs of weakness and the Federal Reserve is expected to kick off its own easing campaign.

Still, today’s print showed “continued strength in core services inflation,” reflecting “the tightness in the labor market, which is keeping wage growth elevated.”

What Bloomberg Economics Says:

Mexico’s non-core prices fell quickly in August as supply shocks faded, while core inflation extended a gradual downtrend. Price gains remained above target, but were in line with central bank forecasts for continued moderation into next year. And with tight monetary conditions, weak growth and increasing economic slack, that’s likely to be enough for most policymakers to support additional interest-rate cuts. Accumulated peso depreciation since April, higher labor costs and persistent high inflation expectations are the main risks for inflation to stay above target over the two-year monetary policy outlook.

— Felipe Hernandez, Latin America economist

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Weather Impact

Prices of fruits and vegetables were the main driver of the slightly better-than-expected print, dropping 5.21% on the month. Energy costs, on the other hand, rose 0.48% and services picked up 0.27%. Central bank Deputy Governor Jonathan Heath said in an interview last week that it was uncertain how soon food price pressure would cool to bring policymakers relief.

“The impact of adverse weather conditions is gradually easing, reducing upward pressures in the non-core component,” said Andres Abadia, chief Latin America economist at Pantheon Macroeconomics.

Headline inflation should cool further to 4.4% by December, as demand remains soft amid tight financial conditions, Abadia said. “The biggest risk in the short-term comes from domestic politics and its impacts to the currency,” he added.

Recent political tensions in the Mexican Congress, where the ruling party and its allies are preparing to pass a bill that would change the constitution and overhaul the judiciary, has added to uncertainty about the path of the currency and inflation. The Senate is expected to vote on the proposal this week.

The peso has declined nearly 15% year-to-date, one of the worst performances in emerging markets, as government reforms worry investors. A weaker exchange rate risks fanning inflation by making imports more expensive.

Still, Mexico’s economic slowdown could help damp consumer prices, with the central bank in August dialing down its forecast for 2024 gross domestic product growth to 1.5% from 2.4%.

--With assistance from Rafael Gayol.

(Updates with Bloomberg Economics comments)

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