Mexico’s Inflation Slows, But Central Bank Remains Cautious
Mexico’s annual inflation rate slowed down slightly in early December, but services prices remained under pressure, supporting the central bank’s cautious stance on interest rates.
A Positive Data Point
According to official data, consumer prices rose 4.44% in the first two weeks of December from a year prior, just above the 4.4% median estimate of economists. This marks a slight decrease from the 4.55% reading in late November. Core inflation, which excludes volatile items such as food and fuel, accelerated to 3.62%, just above the 3.59% median estimate.
Services Inflation Remains a Concern
Services inflation was the main driver of the period, which is a cause for concern for the central bank. Andres Abadia, chief economist for Latin America at Pantheon Macroeconomics, notes that while the moderation in economic growth and the effect of high rates are putting a limit on inflationary pressures, pressure remains at the core level, especially in services.
Central Bank’s Cautious Stance
The central bank, which targets inflation of 3%, plus or minus 1 percentage point, lowered borrowing costs by a quarter-point to 10% in an unanimous decision last week. Policymakers expect that the inflationary environment will allow further reductions, but they also noted risks to that assessment, including potential trade policy shifts under incoming US President Donald Trump.
Trade Policy Risks
Banxico Governor Victoria Rodriguez warned that trade tariffs, if enacted, could have a mixed effect on inflation. While they could weigh on activity and hence put downward pressure on costs, if limits on trade flows impact the exchange rate, that may also stoke price increases.
Room for Further Easing
Despite the risks, Kimberley Sperrfechter, an emerging markets economist at Capital Economics, believes that the fall in Mexican inflation gives Banxico room to continue to ease monetary policy. However, she expects the bank to continue to cut in 25bp steps, rather than step up the pace of easing.
Economic Activity Shrinks
A separate report showed that Mexico’s economy shrank by 0.73% on the month in October. Banxico revised its 2024 GDP estimate up to 1.8%, but held the 2025 forecast at 1.2%, implying a fourth year of slowing growth.
Looking Ahead
The central bank’s next rate-decision meeting is scheduled for February 6. With inflation still above target and services prices remaining under pressure, it remains to be seen whether Banxico will continue to ease monetary policy or take a more cautious approach.
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