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The further rise in Mexico’s headline inflation, to 3.8% YoY in February, was largely driven by higher fuel prices. This trend has further to run in the coming months which, alongside the recent downward pressure on the peso, suggests that Banxico will refrain from further monetary easing from here, in the view of Nikhil Sanghani, Latin America Economist at Capital Economics.

Key quotes

“The breakdown of the data showed further rises in fuel inflation offsetting weaker food inflation. Transport and housing inflation, which includes petrol and gas respectively, rose particularly sharply last month. This outweighed the continued slide in food inflation in February. Meanwhile, price pressures were fairly strong in most other categories, causing core inflation to tick up from 3.8% to 3.9%.”

“We think that headline inflation will rise well above Banxico’s 2-4% target range in the coming months. Unfavourable base effects combined with rising oil prices in recent weeks will cause a surge in energy inflation in late Q1 and much of Q2. The recent sell-off in the peso will also put upward pressure on prices. Accordingly, headline inflation will probably rise close to 5% in the next few months, while it’s likely that core inflation will remain stubbornly close to 4% too.”

“Rising inflation will probably cause jitters at the central bank and put an end to Banxico’s easing cycle.”