Macro Analysis /

Mexico: 1H-August CPI – Food items keep pushing annual rates higher

  • Headline inflation rose 0.42% 2w/2w, surprising higher once again. Most of the increase was driven by the core (0.49%)

  • Hence, annual headline inflation reached 8.62% from 8.14%, with the core also higher at 7.97% from 7.75%

  • We reiterate our view of a 75bps hike by Banxico on September 29th, with the rate by year-end at 10.00%

Alejandro Padilla Santana
Alejandro Padilla Santana

Executive Director of Economic Research and Financial Markets Strategy

Leslie Thalia Orozco Velez
Manuel Jimenez Zaldivar
Francisco Jose Flores Serrano
Juan Carlos Alderete Macal
24 August 2022
Published byBanorte
  • Headline inflation (1H-Aug): 0.42% 2w/2w; Banorte: 0.33%; consensus: 0.36% (range: 0.27% to 0.43%); previous: 0.23% 

  • Core inflation (1H-Aug): 0.49% 2w/2w; Banorte: 0.37%; consensus: 0.35% (range: 0.30% to 0.40%); previous: 0.30% 

  • Data remains pressured, especially the core. Goods accelerated (0.7%), both because of processed foods (0.8%) and ‘others’ (0.6%). In services (0.2%), education grew 1.0% on higher college (1.2%) and high school (2.0%) tuitions, albeit compensated by tourism-related categories. The non-core was mixed, with agricultural goods (0.4%) higher than with energy (0.0%), with the latter aided by electricity 

  • In bi-weekly frequency, annual inflation picked up to 8.62% from 8.14%. The core was algo higher, at 7.97% from 7.75%. On a more positive note, we think this month we could see a high in the headline 

  • We reiterate our call of +75bps by Banxico on September 29th –following the Fed– and the reference rate at 10.00% by the end of the year 

  • Market expects Banxico to continue with the same pace of hikes in September

Inflation remained high in the 1st half of August. The headline (0.42% 2w/2w) was higher consensus, with most pressures still at the core (0.49%). In the latter, goods accelerated (0.7%), with processed foods still not showing signs of relief (0.8%). We highlight higher prices in milk, corn tortillas and sodas, among others. ‘Other goods’ (0.6%) also increased more strongly, noting seasonal effects (e.g. school supplies given the return to classes). Services grew 0.2%, with tuitions (1.0%) also affected by the latter factor. On the contrary, airfares (-12.5%) and tourism services (-2.8%) adjusted as summer vacations ended. Nevertheless, non-tourism kept exhibiting difficult dynamics. At the non-core, energy (0.0%) was helped by electricity (-0.4%), with LP gas (-0.1%) and low-grade gasoline (0.1%), more stable. Nevertheless, agricultural goods rebounded 0.4% after falling 0.2% in the previous fortnight, with relevant pressures on fresh and vegetables (1.6%).

Still cautious on inflation, despite the possibility of reaching a peak close. In bi-weekly frequency, annual inflation picked up to 8.62% from 8.14%. The core was algo higher, at 7.97% from 7.75%. On a more positive note, we think this month we could see a high in the headline close to 8.8%. Nevertheless, the core would take more time to fall, with our forecast path showing these pressures extending towards the fourth quarter towards 8.4%. On the latter, we warn that more companies have been announcing price adjustments. Among them, we highlight Coca Cola FEMSA, which stated that sodas and other drinks increased on August 17th, which comes on top of a similar change in the 1H-June. In addition, milk producer Grupo Lala hiked prices by about $1 on average in several products starting on August 15th. As we have mentioned previously, it is our take that these moves reflect cost pressures, with food especially –but not exclusively– affected. On the other hand, we believe risks remain skewed to the upside. One key driver to watch for during the rest of the year is the minimum wage (MW) increase for 2023. We recall that the MW is at $172.87 per day after increasing 22% for this year. The National Wage Commission wants to update the target for the MW by the end of 2024 due to price pressures, from $226 per day currently, to $260. This would imply 50.4% growth in two years. Given significant cost pressures in other fronts, the decision could gain even more relevance for Banxico’s policy rate path next year. Broadly speaking, the outlook still looks challenging, in our view maintaining the central bank vigilant.

Banxico to follow the Fed, at least for the rest of 2022. We reiterate our call of +75bps by Banxico on September 29th and a reference rate at 10.00% by the end of the year. On the former, we pencil-in this move as we expect the Fed to hike in the same magnitude on September 21st. In this respect, we note that Deputy Governor Jonathan Heath said late last week that this is the most likely scenario at least for the rest of the year, and that he would not even consider otherwise. Although we identify him among the most hawkish members of the Board, we think the majority could have a very similar rationale. Hence, we do not see Banxico as decoupling from the Fed anytime soon.

From our fixed income and FX strategy team

Market expects Banxico to continue with the same pace of hikes in September. Since Banxico’s latest decision, on August 11th, the market has recalibrated its expectations towards a more aggressive hike of 75bps in September from a moderation in the tightening cycle to 50bps at the beginning of the month. The foregoing, in a backdrop of prevailing upward risks for inflation with constant negative surprises both in Mexico and other regions (e.g. Europe). In this period, Mbonos and TIIE-IRS curves have registered a steepening bias with a 40bps sell-off, on average. Currently, the curve is pricing-in implicit hikes of 138bps for the rest of the year, slowly approaching our 10.00% call (+150bps).  In terms of strategy, last Thursday we recommended paying TIIE-IRS (26x1) and receive 2-year SOFR with an entry of 583bps, target of 620bps and stop-loss of 565bps (current: 598bps). The investment horizon is 3 months. We believe the strategy is attractive due to: (1) Market expectations of an eventual ‘decoupling’ between the monetary policy cycles of Banxico and the Fed, which we do not see; (2) additional room for further hikes in short-term rates relative to those currently discounted for both central banks; and (3) the spread between both securities has decreased significantly. Furthermore, we see greater relative value in Mbonos vs Udibonos. The latter have become more expensive, considering a general increase in breakevens above the 12-month average. In particular, the 3-year reading stands at 4.97% from 4.67% at the beginning of the month.