Annual Inflation Remains Outside Banxico’s Ideal Range

Mexico’s annual inflation has slowly decreased from its peak in Abril, dissipating from 6.08 percent to 5.81 percent in July and marking the fifth consecutive month the rate landed outside the ideal range set by the country’s central bank, Banco de México (Banxico). For reference, the bank’s inflation target is 3 precent, plus or minus 1 percentage point.

The National Institute of Statistics and Geography (INEGI) says the 0.07 percent difference represents a slowdown when compared to June, indicating that monthly inflation accelerated to 0.59 percent. Meanwhile, the National Price Index (INPC) cites an increase in food and LP gas prices for the persistent inflation rate.  

The underlying price index, which controls for products with high price volatility, such as primary goods and basic energy, had an annual variation of 4.66 percent, the highest since December 2017 when it reached 4.87 percent. Merchandise prices were 5.74 percent above the annual rate, representing only a 0.07 percent decrease from last month.

Non-core balance, which accounts for volatile products, unsurprisingly observed the highest inflation rate growth from last year standing at 9.39 percent, falling only 0.61 percent from June.

At Banxico’s monetary policy meeting in June, the bank had opted to raise its benchmark interest rate by 25 base points to 4.25 percent in order to avoid adverse effects on inflation expectations, citing price information in the US. Board members were divided on this approach, some calling the inflationary pressures temporary, while the majority were concerned about observable supply chain disruptions.

"Core inflation will continue on an upward trajectory, approaching 5 percent by year end, unless Banxico ramps up its rate hikes during the remainder of the year to normalize monetary conditions to at least their neutral level," said Alfredo Coutino, head of Latin America Economic Research at Moody's Analytics.

Banorte analysists also projected inflation to close at 5.0 percent at the end of the year, implying three additional increases of 25 base points. It does not expect general inflation to fall to 3.7 percent until the end of 2022.

Banxico’s next policy decision should be announced Thursday, August 12, where a Citibanamex survey forecasts the central bank will increase its lending rate by 25 base points.