Mexico Core Inflation Higher than Expected in Early November, Rate Hikes will Continue

Mexico: Mexico’s yearly consumer prices slowed more than anticipated during the first half of November, however, the core inflation index – which stays a main concern in the country as it wrestles with high costs – came in above market forecasts.

On Thursday, Data from the national statistics agency INEGI showed that annual headline inflation in Mexico hit 8.14% in the period, down from 8.53% a month ago and also below the agreement of 8.24% in a poll of economists.

However, the firmly watched core price index, which strips out some volatile food and energy prices and was recently dubbed the greatest concern by Bank of Mexico board member Jonathan Heath, continued to trend up, reaching 8.66% on an annual basis. Economists polled by the media agency Reuters had expected it to come in at 8.60%, after hitting 8.39% in mid-October.

The most recent inflation figures upheld expectations that the local central bank, known as Banxico, would keep hiking interest rates. “Overall, headline inflation continues to edge down in Mexico, but core inflation remains sticky, which will continue to keep policymakers uneasy,” said Pantheon Macroeconomics’ chief Latin America economist, Andres Abadia.

In a podcast published on Wednesday, Banxico’s Heath said the central bank was not ready yet to decouple from the U.S. Federal Reserve and that more rate hikes were needed to control inflation.

On a monthly basis, Mexico’s headline inflation rose 0.56% while the core index was up by 0.34% in mid-November, the statistics agency said. Economists had projected increases of 0.65% and 0.30%, respectively. The fresh core inflation increase is set to “strengthen the hand of the hawks at Banxico in the debate over how much more tightening to deliver,” said Jason Tuvey, senior emerging markets economist at Capital Economics.

Borrowing costs in Latin America’s second-largest economy are currently at 10%, with a further round of monetary tightening set to begin in mid-2021. Banxico is scheduled to release later on Thursday minutes of its most recent policy-setting meeting. Economists at Grupo Financiero Banorte said they expect additional details on the conditions needed for Banxico to decouple from the Fed as well as the appropriate level for its terminal rate.

Latin American peer Brazil, where the tightening cycle has already come to an end, also released inflation data on Thursday. Consumer prices there increased by 0.53% in the month to mid-November.