Inflation in the first fortnight of May was -0.06% f/f (consensus: -0.06%; BBVA: -0.01%), decreasing in annual terms to 7.58% from 7.68% in April. Core inflation increased 0.31% f/f (consensus: 0.27%; BBVA: 0.35%), accelerating from 7.22% y/y to 7.24%. This print compares adversely with the -0.36% f/f average May bi-weekly print in the decade prior to the pandemic. The relatively high bi-weekly inflation print is mainly due to persistent pressures within the core food and other services sub-indexes, a milder seasonal decline of energy prices due to a more market-oriented fuel pricing policy and soaring livestock prices in the fortnight.
The core inflation print (0.31% f/f) is substantially higher than the prints before the pandemic, which averaged 0.13% f/f. This deviation is due to the sharp increases of processed food prices (0.57% f/f) and other services (0.4% f/f). Processed food prices are under pressure due to higher commodity prices caused by the recovery and the Rusia-Ukraine war. We anticipate that these prices will remain under pressure for longer despite the plan recently announced by the federal government to reduce inflation. In the case of other services, the pressures are due to the recovery of demand for tourism services, coupled with higher energy prices that in turn affect transport prices. These pressures could fade in coming months once seasonal patterns normalize completely.
On the positive side, the rest of core inflation behaved substantially more in line with its pre-pandemic pattern. It is particularly favorable that pressures seem to be easing within the other goods sub-index, as it had been affected by the disruptions of supply chains when the consumption of goods relative to services increased due to the pandemic. As such, while today’s print still shows substantial distortions, inflation seems to be progressing towards normalization.
Non-core inflation decreased -1.15% f/f, less than what it did in the decade before the pandemic (‑2.18% f/f). When the fuel pricing policy started to mirror more closely global market dynamics, we warned that the seasonal pattern of the energy sub-index would become softer, with smaller declines in April and May and milder increases in October and November due to the subsidies applied to electricity prices. This was the case this year as the f/f increase in regular (0.46%) and high-octane (0.72%) gasolines partially offset dropping electricity prices (-20.36% f/f). Livestock prices though are increasing at a fast pace (0.65% f/f) due to higher commodity prices. In sum, while less distorted by the pandemic, non-core inflation is structurally declining less in the spring, which provides stickiness to inflation in the current context.
The persistence of supply bottlenecks and the rise in commodity prices are really adding strong pressures in Mexico. The efforts recently announced by the federal government will provide limited relief at best, as these pressures are global in nature and will take longer to clear. Given this, while inflation is already moderating, progress will be slow during the rest of 2022. We are thus updating our end-of-year forecasts from 6.7% y/y to 7.1% y/y for headline inflation, and from 6.0% y/y to 6.3% y/y for core inflation.
Banxico recently signaled its willingness to hike its rate at a faster pace if inflation conditions warrant it. Therefore, we expect the MBono curve slope to remain very low, inverted even, and thus stand pat on our underweight stance in the nominal curve. We are maintaining a neutral stance towards the Udibono curve and prefer the short and long ends.