Economics: No clear consensus on inflation
Inflation in Mexico has proven to be more stubborn this year than monetary authorities had earlier projected, and additional pressures are looming. Higher prices for LP gas, some produce, and certain goods have been especially apparent in recent inflation reports and prompted both Banco de México and analysts to raise their inflation intervals for the current year, with the former forecasting a 3.8% level and the market anticipating prices will rise 4.1%. We at GEA estimate it will end the year at 4.38%.
Banxico has said that its projection depends on its assumptions of an orderly forex market, an absence of labor-market related pressures, and a significant reduction in non core inflation throughout 2018. It is also cognizant of the threat of uncertainty on the Nafta and broader trade fronts, and in relation to the presidential elections in Mexico, factors that might weaken the peso and stoke heightened volatility in financial markets. Such concerns have led the monetary authority to announce a series of tightening moves – including the quarter-point increase it implemented in February – designed to prevent such factors from pressuring inflation higher and unleashing second-order effects while helping to anchor inflation expectations. Such initiatives are also needed to build confidence in Banxico’s assurances that inflation can be brought back into line with its tolerance range faster than analysts are predicting.
But the prospect that US tax cuts and spending increases could contribute to an overheating of the economy has also encouraged the Fed to raise rates faster than was assumed as part of its orderly normalization of policy, and such moves can tighten the credit market for economies such as Mexico and apply the brakes to investment and consumption, a threat that local monetary officials have to weigh.
Current conditions point to Banco de México's maintaining a tightening bent and possibly raising rates by a quarter of a percentage point as soon as mid April, along with at least one other tightening move thereafter. If that succeeds in containing inflation expectations it could start lowering rates before year-end and make its claims that inflation could fall to below 4% in less than 12 months.
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