Mexico Inflation Slows to 3.72% in Early December

Mexico’s annual inflation rate decelerated during the first half of December, reinforcing Banxico’s recent decision to extend its interest rate reduction cycle. The national statistics institute, INEGI, reported that consumer prices rose 3.72% annually, falling below the median analyst projection of 3.88% and the 3.80% rate recorded at the end of November.

The core inflation rate, which excludes volatile food and fuel prices, also eased to 4.34%, down from 4.43% in late November. The current figures align more closely with Banxico’s target range of 3.0%, which carries a one-percentage-point margin of flexibility.

The slowdown was largely driven by a significant decline in specific agricultural segments and stabilizing energy costs.

• Primary Decreases: Fruit and vegetable prices fell by 5.66%, led by lower costs for tomatoes, serrano peppers, and zucchini. Prices for eggs, chicken, and papaya also moderated.

• Energy Stability: Energy product prices remained relatively flat, rising only 0.28%.

• Offsetting Increases: In contrast, livestock product prices rose 6.36%. Upward pressure also came from air transportation, tourist packages, green tomatoes, and sugar.

Monetary Policy and Economic Outlook

Following these trends, Banxico’s governing board voted last week to lower the benchmark interest rate by 25 basis points to 7.0%. This marked a split decision, as sub-governor Jonathan Heath dissented in favor of maintaining the rate at 7.25%. Heath has expressed concern that the bank's 3.0% inflation target for the third quarter of 2026 may be unrealistic, potentially impacting the institution's credibility.

Banxico said the current easing cycle remains consistent with the global disinflation trend and ongoing weakness in domestic economic activity. However, policymakers revised their short-term forecasts for both headline and core inflation higher. Despite the upward adjustments, the bank reiterated its expectation that inflation will converge to its 3.0% target by the third quarter of 2026.

Most market analysts anticipate that Banxico will pause its easing cycle during its first meeting of 2026, scheduled for February. The central bank is expected to monitor the effects of minimum wage increases and potential fiscal adjustments before resuming rate cuts at a more gradual pace.

Meanwhile, the Institute of International Finance (IIF) has issued a cautious outlook for Mexico, projecting 2026 GDP growth at just 0.9%. This forecast underscores a widening gap between independent financial analysis and the Mexican government’s more optimistic 2.3% budget projections.

Analysts highlighted institutional instability, uncertainty regarding the upcoming USMCA review, and potential trade tariffs as major headwinds. Additionally, the report notes that persistent infrastructure deficiencies and supply chain bottlenecks continue to stifle productive investment.