According to data released by the National Statistics Agency INEGI on Thursday, Mexico’s headline rate of inflation declined dramatically in July and reached its lowest level since Dec 2020.
The inflation rate fell to 3.51% in July, from 4.32% a month earlier and slightly lower than the economists’ expectation of 3.53%.
This latest reading indicates a noticeable slowdown of consumer price rises in Latin America’s second largest economy.
According to market expectations, the consumer price index rose by 0.27% on a monthly base.
Decelerating inflation signals easing of pricing pressures for a wide range of products and services. This can be a relief to policymakers who are navigating a changing economic landscape.
The core inflation rate remains above the target
The core inflation rate in Mexico was elevated in July. This raised concerns over underlying pressures on prices and challenged the growing confidence of the central bank in recent drops in headline inflation.
According to the data of the National Statistics Agency INEGI (which excludes volatile items like food and energy), core consumer prices rose 4.23% on an annual basis, slightly lower than in June when they increased 4.24%. This is also in line with expectations.
This figure is still well over the Bank of Mexico target of 3 %, and can be interpreted as plus or minus 1 percentage point.
Monthly, the core price increased by 0.31%. This was also expected.
The headline inflation rate has declined considerably. However, persistently high core inflation indicates that there are still price pressures across the board.
The central bank is unable to adopt a more accommodating monetary policy because of the continued high inflation.
The stickiness of core inflation, even though the overall inflation rate has improved, indicates that there is still significant inertia in some sectors. This limits the ability for Banxico to ease its policy in the near term.
Banxico: Markets watch for next moves
Banxico was expected to announce its interest rate just hours after the inflation figures were published.
Investors and analysts are watching to see whether the central bank continues its recent monetary ease or takes a more conservative approach.
Banxico reduced its benchmark rate of interest by 50 basis point to 8% in the meeting held on June, marking the fourth consecutive cut.
The decision wasn’t unanimous.
Jonathan Heath, the Deputy Governor of Ontario, expressed concern about inflation in core and global economic developments.
The minutes of the June meeting revealed that four members of the board who backed the rate cut were open to the idea of a gradual change in future rates.
This guidance has sparked speculation that Banxico may opt for a small 25 basis-point reduction at its meeting in August.
If the benchmark rate of lending were to drop by 25 basis points, it would be reduced to 7.75%.
Banxico’s most likely path forward, given that the core inflation rate remains higher than target and the uncertainty surrounding the outlook for the global economy, is to take a more gradual approach rather than one bold.
The ICD published the following article: Mexico Inflation hits multi-year low but Core Rate keeps Pressure on Banxico
