Decelerating Inflation Signals Fragile Economic Recovery in Mexico

Mexico’s annual inflation rate reached a 20-month low of 6% during the first half of May, marking a decline of 0.25 percentage points from the end of April, according to the national statistics agency INEGI. This decrease in consumer prices by 0.32% from the second half of April resulted in the lowest headline inflation rate since September 2021.

INEGI’s report revealed that the annual core inflation rate, excluding volatile food and energy prices, stood at 7.45% in the first half of May, down from 7.67% in April. Both the headline and core inflation rates were lower than economists’ median forecasts.

The recent data release comes shortly after the Bank of Mexico (Banxico) concluded a nearly two-year-long monetary policy tightening cycle, maintaining the benchmark interest rate at a record high of 11.25%. While inflation has shown a steady decline throughout the year, the current rate remains double the central bank’s 3% target.

To achieve a sustained convergence of headline inflation to the desired target, Banxico emphasized the necessity of maintaining the reference rate at its current level for an extended period. However, with the downward trajectory of inflation, some analysts speculate that rate cuts could be implemented by the end of the year.

Natalia Gurushina, chief emerging markets economist at investment manager VanEck, suggests that Banxico’s current pause is safe and there might even be room for rate cuts later in the year. Meanwhile, Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, predicts that rate cuts may take place in September or November, as inflation continues to decrease rapidly, particularly core inflation.

INEGI’s data highlights that processed foods, beverages, and tobacco witnessed an 11.6% increase in prices compared to a year earlier, while meat prices rose by 6.9%. Fruit and vegetable prices rose by 3.9% annually, and services experienced a 5.4% increase. However, in the first half of May, prices for fruit and vegetables, as well as meat, decreased compared to the second half of April, while prices for goods in general, services, and housing continued to rise.

The decline in energy prices, including fuel and electricity, contributed to downward pressure on inflation, with a 1.5% annual decrease and a 3% drop from the last half of April.

INEGI is set to publish inflation data for the entirety of May in early June, ahead of a Banxico monetary policy meeting scheduled for June 22.