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Inflation on target or not yet?

October 09, 2019

Consumer inflation was 3% per year in September. It is the lowest rate since September 2016, leaving behind the indirect effects of the exchange rate and gasoline.

The decrease in inflation is explained by the non-core component that reports the smallest advance since it has been recorded (0.71%).

Energy and agricultural products (fruits and vegetables) show zero pressure on prices. The price of gasoline magna is just 0.3% higher than in September 2018, while electricity rates have risen only 1.5%. The entire energy sector presents a general fall in prices of 3.1% per year.

The prices of fruits and vegetables as a whole increase 0.7% annually.

On the other hand, core inflation (excluding volatile products such as fruits and vegetables and energy) stands at 3.75%.

It accumulates 18 months with little variations despite the very restrictive monetary policy of Banco de México.


In particular, educational services (4.7%) and others such as entertainment, restaurants, professional services (4.3%) register increases above inflation. Also the prices of processed foods and beverages (4.6%) do not show signs of decline.

Only non-food goods (clothing, footwear, furniture, etc.) and housing (rents, maintenance) have been accommodated in the goal of Banxico by presenting an inflation of 2.9%

The reluctance of core inflation to converge towards the 3% target, despite the weakness of domestic demand, is based, among other factors, on wage increases.

According to Banco de México, in the first quarter of 2019, the dynamics of the prices of services seems to have been influenced upwards by the behavior of their production costs, among which energy prices and wages stand out. This is especially relevant for services, which are less subject to international competition.

A greater reduction in core inflation would give Banxico more tools for further interest rate cuts, especially in 2020.

The game between rising wage costs and weak demand will be the balance sheet for core inflation.

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