Mexico’s annual inflation slowed in line with expectations in October, giving the central bank some maneuvering room as it prepares for one of its last interest rate decisions of the year.
Consumer prices rose 4.26% in October compared to the same period a year earlier, down from 4.45% in September, the national statistics institute reported Thursday. The print matched the median estimate of analysts surveyed by Bloomberg. It is the lowest headline reading since February 2021.
Banxico, as Mexico’s central bank is known, is set to publish its November interest rate decision later in the day. Analysts expect board members will hold borrowing costs at 11.25% for the fifth straight meeting as inflation concerns persist. The statement on monetary policy, which is its second-to-last of the year, is widely expected to remain hawkish.
Mexico’s strong economy, which analysts in the Citi survey published this week see expanding by 3.4% this year, has been a driver of inflation. At the same time, unemployment levels have been at historic lows as private investment has flowed into northern states with a track record of exporting to the US.
The bank’s decision is expected to be influenced in part by core inflation, which slowed to 5.5% and has been a long-time concern for board members. The central bank targets inflation at 3%, plus or minus one percentage point.
“Core inflation, in particular services, remains sticky. And the economy is booming,” said Carlos Capistran, the head of Mexico and Canada economics for Bank of America. “We continue to expect Banxico to remain on hold for many months, with upside risks in the short term. We expect the first cut in June 2024.”
Electricity prices spiked, as seasonal subsidies ended in some states. Cooking gas was also a top inflation contributor in October, along with sugar, housing and airfare, according to the national statistics institute.
“The worrying part continues to be the services sector inflation, which does not retreat,” said Jessica Roldan, chief economist at Casa de Bolsa Finamex. “The positive surprise is in agricultural data, which continues to help.”
Higher salaries, plus an upcoming minimum wage increase, are thought to pressure services inflation in the coming months.
What Bloomberg Economics Says
“Persistent services inflation support central bank concerns about rising costs and strong domestic demand. Non-core inflation, which has accounted for most of the slowdown this year, is low, but has bottomed and is poised to inch up.”
— Felipe Hernandez, Latin America economist
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Banxico also has kept an eye on the US Federal Reserve, which in its latest decision made higher borrowing costs sound unlikely – though it did not rule them out.
“Banco de Mexico is playing the same game as developed countries, which is using the forward guidance to signal that they’re going to go ‘higher for longer’ to manage the expectations of the market,” said Joan Enric Domene Camacho, chief Latin America economist at Oxford Economics.
--With assistance from Rafael Gayol.
(Update with comparison data starting in second paragraph)