Macro Analysis /

Mexico: September CPI – A downward surprise, but the trend remains challenging

  • Headline inflation stood at 0.62% m/m, with the core at 0.67%. Overall, pressures were lower during the 2nd half

  • As such, annual headline inflation was unchanged at 8.70%, but with the core still climbing to 8.28% (previous: 8.05%)

  • We reiterate our call of a 75bps hike in November and a 2022 year-end rate at 10.50%

Juan Carlos Alderete Macal
Juan Carlos Alderete Macal

Director of Economic Research

Leslie Thalia Orozco Velez
Manuel Jimenez Zaldivar
Francisco Jose Flores Serrano
7 October 2022
Published byBanorte
  • Headline inflation (September): 0.62% m/m; Banorte: 0.68%; consensus: 0.67% (range: 0.61% to 0.73%); previous: 0.70% 

  • Core inflation (September): 0.67% m/m; Banorte: 0.71%; consensus: 0.73% (range: 0.68% to 0.80%); previous: 0.80% 

  • The figure was benefitted by lower pressures in the core in the 2nd half. In goods (0.9% m/m), we highlight the slight moderation in processed foods (1.1%). The main surprise within services (0.4%) was a hefty drop of 4.0% in mobile phone services, with seasonal factors related to the return to classes also influencing. In the non-core, the relief came from energy (-0.7%), with agricultural goods (1.5%) still high 

  • Annual headline inflation was unchanged from the previous month at 8.70%. Nevertheless, the core advanced again, to 8.28% from 8.05% in the same period 

  • We reiterate our call of a 75bps hike by Banxico in November, with the reference rate reaching 10.50% by the end of the year 

  • Market expects Banxico to maintain the hiking pace in November

September’s inflation at 0.62% m/m, still higher than historical averages. Meanwhile, the core reached 0.67%. The second half of the month showed a moderation in both categories, although not enough to reverse built-up pressures in the first half of the month. We highlight goods at 0.9%, lower at the margin, especially on processed foods (1.1%). We did not identify new and important announcements of price adjustments, although this category stayed high. ‘Others’ stood at 0.8%, not so distant from its latest performance. Services (0.4%) surprised to the downside. First, they were influenced by the seasonality of the return to classes. As a result, education (2.1%) rose, airfares inched higher (0.6%), and tourism services (-1.2%) fell. But the single most relevant highlight was the 4.0% decline in mobile phone services, slashing 4bps to the headline. Other categories such as ‘dining away from home’, maintain challenging dynamics. The non-core (0.5%) also provided some relief, especially energy (-0.7%) since the first fortnight, especially LP gas (-3.3%). Low-grade gasoline accelerated in the second half, although lower for the full month (-0.6%). Agricultural goods were skewed to the upside, with pressures mostly in fruits and vegetables (1.5%), but also in meat and egg (0.8%).

The rise in annual inflation pauses temporarily. With these results, headline inflation was unchanged from the previous month at 8.70%. Nevertheless, the core picked up to 8.28% from 8.05% in the same period. As we detailed in the previous fortnight, we believe both will remain to the upside in the short-term. Among the latest news, we had a complementary agreement to the Plan Against Inflation early this week. However, we believe its effect will be limited. In addition, press reports assure that COPARMEX will propose a 15% increase for the minimum wage in 2023 in coming days, topic which we have already warned as important for inflation and its expectations. We still believe that the adjustment will be closer to 20%. On other fronts, the situation on energy prices remains fragile. On one hand, OPEC+ will cut production starting in November; on the other, the US government could evaluate if it limits the export of oil and refined products (such as gasolines). Although it seems little likely to be implemented, we do not rule out volatility and even pressures due to this. Lastly, in the short-term we will be looking into: (1) Potential upside distortions in goods such as TVs and computers ahead of the FIFA World Cup 2022 in Qatar, which begins on November 20th; (2) the magnitude and scope of discounts during El Buen Fin, which will return to its four-day format from November 18th to 21st. Overall, we remain cautious over the trajectory for prices, seeing inflation by the end of the year at 9.0%, above analysts’ expectations.

Banxico will maintain the course, at least for now. In our opinion, the recent evolution of domestic inflation, the forward guidance and comments from Fed speakers about upcoming decisions, and the increase in financial market volatility, suggest that the central bank will continue with a very cautious stance. In this context, we reiterate our call of a new 75bps reference rate hike on November 10th, followed by +50bps in December, closing the year at 10.50%. Among other things, we will look carefully to possible signs regarding monetary policy in the minutes of the last decision, which will be released next week.

From our fixed income and FX strategy team

Market expects Banxico to maintain the hiking pace in November. In Mexico, as globally, inflation remains high and without clear signs of slowing down. Hence, the market expects Banxico to continue with the same pace of 75bps hikes in November, as in the three previous decisions. As a result, the benchmark rate would stand at 10.00%, in line with our call. However, it is pricing-in additional adjustment of only 75bps for the rest of the year, ending the tightening cycle at 10.75% against our expectation of 11.00% (+100bps). Therefore, we believe rates are poised for renewed pressures, mainly in short-term tenors, while extending their flattening bias and even more inversion of nominal yield curves. Given high volatility, we reaffirm our preference for relative value strategies, although Mbonos Nov’38 and Nov’42 reflect an attractive valuation. In this sense, we maintain our trade idea to pay TIIE-IRS (26x1) and receive 2-year SOFR, initiated on August 18th. For its part, inflation hedges have become more expensive in relative terms, with breakevens for all maturities trading close to 12-month highs. Therefore, we do not see enough attractiveness in CPI-linked bonds (Udibonos), at least for now.