Core inflation in January surprises Banxico and favors a half-point rise in the rate

The Governing Board of Banco de México recognized that the underlying inflation dynamics made it necessary to raise the rate by 50 basis points during the first monetary announcement of the year, thus repeating the magnitude of the increase applied in December.

“The core component, which better reflects the inflation trend, stood at 8.45% (in January), surprising on the rise. This in the face of a slower decline than expected in the inflation of food merchandise and the rebound in services,” they said in the statement.

According to the director of economic and financial analysis at Banco Base, Gabriela Siller Pagaza, underlying inflation determines the path of general inflation in the medium and long term.

And the annual variation at the January cutoff represents an increase from the 8.35% that it reached in December 2022, it is approaching the peak of 8.51% observed in November of last year and is more than double the punctual goal of Banco de México.

“Core inflation has risen in 25 of the last 26 months. In that period it went from 3.66% in November 2020 to 8.45% where it was located in January of this year,” the expert stated.

And he highlighted that underlying inflation explained 79% of monthly general inflation, for January, registering a monthly variation of 0.71%, which was the highest for a similar month since 2014.

Monitoring this indicator is relevant, since three of the deputy governors of the Board explained in the most recent Quarterly Report conference, on November 30, that underlying inflation has a particularly important weight in their decisions. The aforementioned central bankers are Irene Espinosa, Galia Borja and Jonathan Heath.

Siller highlighted that within this indicator, the merchandise subcomponent showed a second consecutive deceleration with an annual variation of 11%, which shows a moderation from the 11.28% reached last November.

But service inflation, which is also part of the subjacent inflation, registered an annual rate of 5.51%, which ranked as the highest since May 2002.

“I am concerned about inflation in the service sector because it does not reflect the disruptions caused by the pandemic. What it is really showing us is the effect of internal demand that has caused the increase in wages and labor costs”.

High rates to cool demand

The expert stressed that the pressure generated by domestic demand, due to the salary increase and the high fiscal deficit, has no other way of mitigating it than by raising rates.

He added that other evidence that the inflationary pressure is domestic is the behavior of the inflation of “other services”, pressured by public spending.

According to the Inegi data, the other services subcomponent showed annual inflation of 7.53%, which is a level not seen since 2001.

The Banco Base strategist recalled that in 2015, precisely in the previous bullish cycle, a similar situation arose with a fiscal deficit of 2.4 points as the one we currently have, and warranted a call for attention from Banxico to moderate public spending in an that does not generate pressures on inflation.

Core inflation is also seen as a thermometer of price conditions in the economy, the core part of the inflationary process, as explained by the director for Latin America of the Moody’s Analytics consultancy, Alfredo Coutiño.