Mexico inflation pressures limit room for Banxico rate cuts

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Mexico inflation pressures limit rate cuts

Highlights

Mexico’s National Consumer Price Index increased 0.41% biweekly in early October, with annual headline inflation rising to 3.62% from the prior period.
Core inflation accelerated to 3.78% annually in early October, up from 3.71%, as goods, services, and non-core components all posted gains.
Persistent inflation pressures, including a 14.8% biweekly jump in air transport prices and higher energy tariffs, limit Banxico’s scope for additional rate cuts in 2023.

October inflation drivers and policy implications

As reported by HR Ratings, the National Consumer Price Index posts a 0.41% biweekly increase in the first half of October, broadly in line with the 16-year historical average of 0.45% for the period. The ratings firm says the end of the warm-season electricity tariff program adds to the usual early-October pressure, while annual headline inflation rises to 3.62% from the prior period.

HR Ratings says headline inflation is likely to remain under pressure through the end of the year, mainly because of further increases in the non-core component. It also expects goods prices to keep building pressure, which limits the room for Banco de México, Banxico, to deliver additional cuts to the benchmark interest rate for the rest of the year.

Core inflation also accelerates, reaching 3.78% annually from 3.71% in the second half of September. That rebound suggests the increase is not explained only by the electricity tariff effect, but also by firmer underlying price dynamics.

Goods, services and energy keep prices elevated

Within core inflation, goods inflation increases to 3.28% annually from 3.19% in the second half of September. Processed food prices show a more moderate move, rising to 4.57% from 4.55%, while services inflation climbs to 4.26% from 4.21%.

Part of the services increase is linked to a 14.8% biweekly jump in air transport prices, amid trends in refined fuel costs such as jet fuel and the effect of geopolitical conflicts in the Middle East. HR Ratings also notes that non-core inflation records a sixth consecutive biweekly increase, reaching 3.08% annually.

Within the non-core index, agricultural prices rise to 1.90% annually from 1.23%, extending an upward path from the low levels seen a year earlier. Energy and government-authorized tariffs stand at 4.02% annually, compared with 3.95% previously, reinforcing the view that price pressures remain broad-based.

In our earlier article on Mario Draghi’s warning about the inflation–growth trade-off, we explained how keeping interest rates too restrictive for too long can worsen debt dynamics and weaken the investment needed for long-term productivity and resilience. We also noted his argument that central banks should prioritize price stability while aiming for the lowest rate path consistent with controlling inflation, because policy choices and communication can materially shape expected rate paths and borrowing costs.

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