Mexican inflation hits 20-year high in first half of November

Annual inflation in Mexico in the first half of November soared to the highest reading since 2001, registering 7.05% compared to 6.24% on average in October.

Core inflation reached its highest level so far this year, with 5.53%, up from 5.19%, according to latest figures by statistics agency Inegi.

The inflation figures have confounded analysts, including concerns over rising core prices and uncertainty on the central bank’s moves to handle the problem.

“Inflation continues to surprise the market, and with this it’s very possible that [the policy] interest rate will rise again, and I don't rule out an increase of 50 basis points,” Gabriela Siller, the head of economic analysis at Banco BASE told BNamericas.

“I don’t think we’ve reached the maximum inflation. I think that we are going to close the year with a level of 7.20%,” Siller added. “Starting in January it could begin to decrease, but in any case, we think it’ll hold above 6% in the first quarter.” 

Headline inflation in the first half of November was 0.69% compared to the previous biweekly period, well above Banorte’s estimate of 0.49%, while the biweekly reading on core inflation, at 0.15%, was more than double the bank’s forecast of 0.07%. 

In a note, Banorte said some increase was expected with various seasonal factors at play. “Among them, energy picked up 3.3% [contribution: 33 basis points], with electricity up 24.2% given the final reversal of summer discounts.” But LPG prices fell 1.9%, while agricultural goods increased 2.2%.

“At the core, other goods [down 0.2%] … benefited from the earlier timing than usual of El Buen Fin (Mexico’s Black Friday), albeit less than expected,” Banorte wrote.

While base effects look to unwind in the coming months, research firm Capital Economics, wrote in a note that “there are also broader signs of strong price pressures. A sharp increase in food prices pushed up inflation in that category to 9.2% year-on-year, from 7.7% a month earlier.”

Source: Capital Economics

It added, “meanwhile, the re-opening of Mexico’s economy continued to put upward pressure on education and recreation inflation.”

The central bank has been increasing the benchmark interest rate to combat the upward trend, with the monetary policy board making its fourth 25 basis point hike, to 5%, on November 12.

But the higher-than-expected increase in inflation also heightens the probability central bank governor Alejandro Díaz de León pushes for a larger 50bp hike on December 16, the last policy decision meeting under his authority.

CHANGE OF GUARD

President Andrés Manuel López Obrador (AMLO) said Wednesday his choice for new governor is deputy finance minister Victoria Rodríguez. The announcement caused consternation, as Rodríguez’s monetary policy position is not known.

It also remains unclear how she plans to run the bank once in office in January.

In finance circles, it is speculated that AMLO made the choice based on his wish to get a central bank more accommodative to economic recovery.   

INFLATION OUTLOOK

The surprise jump in inflation has led Banorte to adjust its year-end forecasts to 7.3% from 6.6% for headline inflation, and to 5.6% from 5.2% for core inflation. 

“The underlying assumption remains that lingering pressures will remain in place, with supply and demand imbalances and the pandemic maintaining a difficult scenario.”

According to the bank, key inflation developments to watch include:

– minimum wage hike for 2022, with an announcement likely in early December; 

– oil market developments, with the US and other countries already announcing releases of “strategic reserves in a bid to push prices lower, albeit also waiting for the response from OPEC and its allies;”

– further volatility or pressure on the peso, possibly fed by more rapid normalization by the federal reserve, but also with contagion from other EM issues, such as Turkey’s adjustment;

– a fourth COVID-19 wave in Europe that could exacerbate supply problems;

– global pressures in some food staples, with warnings that the La Niña phenomenon could continue to disrupt production.