Macro Analysis /

Mexico: 1H-January CPI – Pressures at the start of the year boost annual metrics

  • Headline inflation rose 0.39% 2w/2w, impacted by an adverse seasonality with typical turn of the year adjustments

  • Hence, annual headline inflation reached 7.94% from 7.86%, with the core accelerating marginally to 8.45% from 8.34%

  • As such, we expect Banxico to extend its tightening cycle, albeit reducing the pace once again

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 January 2023
Published byBanorte
  • Headline inflation (1H-Jan): 0.46% 2w/2w; Banorte: 0.39%; consensus: 0.39% (range: 0.24% to 0.48%); previous: 0.10% 

  • Core inflation (1H-Jan): 0.44% 2w/2w; Banorte: 0.34%; consensus: 0.32% (range: 0.24% to 0.38%); previous: 0.19% 

  • The period’s dynamics are impacted by an adverse seasonality, with typical turn-of-the-year adjustments in several categories and taxes. Within the core, pressures are still centered in processed foods (0.7%) and other goods (0.3%). However, education (0.3%) and housing (0.3%) were also impacted in services. At the non-core (0.51%), energy rose (0.6%), boosted by electricity (0.9%) and low-grade gasoline (0.6%) 

  • In bi-weekly frequency, annual inflation adjusted to 7.94% from 7.86%. The core accelerated at the margin, standing at 8.45% from 8.34%, without a clear trend change yet 

  • Banxico will extend its tightening cycle, albeit likely reducing the pace once again 

  • Markets expect the end of the restrictive cycle in 1Q23

cextent, in ‘other goods’ (0.3%) –helped by winter discounts in clothing. In services (0.3%), we note the uptick in education (0.3%), albeit with housing also surprising to the upside (0.3%). In ‘other services’ (0.3%) performance was mixed, with declines in tourism services. However, other categories such as ‘dining away from home’ also adjust at the turn of the year, not ruling out an additional boost from the minimum wage hike. At the non-core (0.51%), energy rose 0.6%, driven by electricity (0.9%) –with tariff adjustments from CFE– and low-grade gasoline (0.6%) –with global benchmarks and excise taxes higher. In agricultural items (0.4%), both fruits and vegetables (0.4%), and meat & egg (0.3%) advanced. Finally, government tariffs rose 0.9%, remembering that several of them are linked to accumulated inflation in the previous year.

An uptick in annual inflation… Headline inflation reached 7.94% from 7.86% in the previous fortnight, showing some stability since the beginning of December and leaving further behind a cycle-high of 8.77% in the second half of August. The core accelerated at the margin, to 8.45% from 8.34%, still not consolidating a clear downward trend. We believe the backdrop keeps favoring a gradual path lower for both components, albeit at different speeds. This would be explained by a more substantial moderation in the non-core, based on two main factors: (1) A more favorable outlook for fertilizers, helping agricultural items; and (2) more positive dynamics for energy. Nevertheless, risks for the latter have increased due to a more vigorous reopening in China that has boosted international oil prices in the last few weeks. A factor that has helped to offset for this is currency strength, with USD/MXN below 19.00 since January 11th. This could also have a positive spillover at the core through the price of imported goods. Meanwhile, we believe it is still soon to evaluate the potential effect to ‘other services’ from the minimum wage hike. Nevertheless, it may well impact costs meaningfully. Given this diversity of factors, we believe the balance of risks to our 4.8% estimate by year-end is balanced, albeit still warranting caution ahead.

…favoring additional tightening from Banxico. Given an inflation outlook that remains complex and the view that the Fed will extend its hiking cycle  –anticipating +25bps in next week’s decision–, it is our take that Banxico will keep increasing the reference rate. Specifically, we expect two more hikes of 25bps each, materializing in the meetings to be held on February and March, reaching a terminal rate of 11.00% by the end of 1Q23.

From our fixed income and FX strategy team

Markets expect the end of the restrictive cycle in 1Q23. The market keeps expecting that Banxico will conclude its hiking cycle in 1Q23. Nevertheless, inflation dynamics remain challenging, as evidenced by today’s surprise. The TIIE-IRS curve has flattened in January, with few changes at the short-end and a 46bps rally at the long-end. With this, the curve is pricing-in two consecutive 25bps hikes, in February and March, to reach a terminal rate of 11.00%, in line with our call. Meanwhile, breakevens have declined slightly and they are below their 12-month averages except for short-term tenors. This was driven by Mbonos (-40bps) outperforming Udibonos (-6bps). It is worth noting that we do not see enough attractiveness in Udibonos yet, even after this correction.