Macro Analysis /

Mexico: 1H-May CPI – Slightly above consensus as food prices remain pressured

  • Headline inflation fell 0.06% 2w/2w, quite high despite a benign seasonality. The core rose 0.31%, with goods leading

  • As such, annual headline inflation reached 7.58% from 7.68% (avg. April), with the core at 7.24% (previous: 7.22%)

  • We expect Banxico to hike +50bps on June 23rd, but risks of a higher pace remain considering inflation and the Fed

Juan Carlos Alderete Macal
Juan Carlos Alderete Macal

Director of Economic Research

Leslie Thalia Orozco Velez
Manuel Jimenez Zaldivar
Francisco Jose Flores Serrano
24 May 2022
Published byBanorte
  • Headline inflation (1H-May): -0.06% 2w/2w; Banorte: -0.01%; consensus: -0.08 % (range: -0.13% to 0.05%); previous: 0.18% 

  • Core inflation (1H-May): 0.31% 2w/2w; Banorte: 0.44%; consensus: 0.28% (range: 0.20% to 0.44%); previous: 0.27% 

  • Inflation was relatively high despite a benign seasonality. The decline in electricity tariffs (-20.4%) on summer discounts was more modest than our estimate. Gasoline and LP gas were more stable, so energy dipped 3.5%. In agricultural goods (0.5%), we highlight meat and egg (+0.6%). At the core, goods (0.4%) were pushed by processed foods (0.6%), with others (0.1%) surprising us to the downside. Meanwhile, services grew 0.3%, with non-tourism categories still somewhat pressured 

  • Annual inflation fell to 7.58% from 7.68% on average in April, signaling that the peak may be behind us. Nevertheless, the core kept climbing at the margin, at 7.24% from 7.22% in the same period 

  • We expect Banxico to hike by 50bps in its June 23rd decision. Risks of a higher pace remain, with focus on inflation and the Fed 

  • Upside risks remain for faster hikes by Banxico

Inflation at -0.06% 2w/2w in 1H-May. This was slightly above consensus and relatively high considering its typical seasonality. The latter is due to energy  (-3.5%) within the non-core (-1.2%). Specifically, the second tranche of summer discounts to electricity tariffs (-20.4%), which were above our call. On the other hand, low grade gasoline (0.2%) and LP gas (0.1%) were more stable as government policies limited moves, with international prices still volatile. Agricultural goods were up 0.5%, mainly on meat & egg (0.6%), with fruits and vegetables (0.2%) more mixed. The core increased 0.3%, with goods (0.4%) still leading as pressures on processed foods (0.6%) have not abated. Milk was among the top ten products with the highest increases. ‘Others’ (0.1%) were our main downward surprise, with several household appliances lower (which may be related to discounts). Services (0.3%) were mixed, mainly affected by airfares (9.8%), dining away from home (0.6%) and restaurants (0.4%).

Annual inflation has like peaked, but the core remains a headache. Headline inflation fell from 7.68% y/y on average in April to 7.58%. This gives us more confidence that the peak (at 7.72% in 1H-Apr) is behind us, in line with our view. Nevertheless, the core stood at 7.24% from 7.22% and is poised to add 18 consecutive months on the upside. Although a lower headline print is welcome, it may well reverse again (although not our base case). In the short-term, main risks include: (1) More severe droughts and surging bird flu cases in Mexico and the US, potentially affecting both fruits and vegetables and meat & egg; (2) export bans in some countries (e.g. wheat and sugar in India, palm oil in Indonesia) that could affect several goods; and (3) still high oil and gasoline prices, with low global inventories. On the contrary, we will look for some relief because of: (4) Discounts during the Hot Sale campaign, from May 23rd to 31st; and (5) zero tariffs in some basic goods since mid-May, based on the Plan Against Inflation.

Banxico to keep hiking, focused on inflation and the Fed. We reiterate our call of a 50bps hike in the decision to be held on June 23. Nevertheless, we keep seeing risks of an even higher pace in the short term, especially as they warned of the possibility of “more forceful measures”. In this sense, we will analyze the minutes this week, especially members’ comments about the conditions that may be needed for the latter to materialize. For details, please see Ahead of the Curve.

From our fixed income and FX strategy team

Upside risks remain for faster hikes by Banxico. High global inflation keeps pressuring central banks to follow a restrictive policy. In Mexico, risks of more aggressive hikes have increased after the more hawkish tone in Banxico's last decision. As a result, the market decoupled Banxico's path from the Fed, assigning the former a 90% chance of a 75bps hike at the June meeting. Cumulatively, the curve is pricing-in implicit hikes of +211bps to end the tightening cycle. This is lower than our call of a terminal rate of 9.50% (+250bps). In this respect, we believe Banxico's minutes will be key to either consolidate or recalibrate market expectations. Since the last meeting, the TIIE-28 IRS curve has flattened, with pressures of 14bps at the short-end and gains of 25bps in the long-end.

Mbonos have also followed this dynamic, gaining 10bps in long-term securities. In our view, the latter segment remains the most attractive, particularly tenors Nov'42 and Nov'47, with further room for appreciation after the strong sell-off in April. However, volatility limits the attractiveness for directional positions. Short-term Udibonos have traded more defensively, highlighting a significant compression in breakevens, although they have not yet reached attractive levels.