Mexico’s inflation rate dropped in February, reversing a four-month upward trend and bolstering the likelihood of the Bank of Mexico (Banxico) lowering its benchmark interest rate later this month. Year-over-year inflation reached 4.40% in February, down from 4.88% in January, according to the national statistics agency INEGI. This figure is slightly lower than analyst expectations (4.44%). The month-on-month increase in consumer prices (0.09%) was the lowest for this period since 2019.
Further strengthening the case for a rate cut, core inflation, excluding volatile food and energy prices, also declined for the 13th consecutive month, reaching 4.64% in February (down from 4.76% in January). This renewed downward trend in inflation increases the chance of Banxico reducing its record-high 11.25% interest rate by 25 basis points on March 21st, as predicted by analysts like Gabriela Siller of Banco Base. However, aggressive rate cuts are not anticipated. Siller projects a maximum reduction of 100 basis points throughout 2024, leaving the rate at a still-high 10.25% by year-end.
Interestingly, the latest inflation data and potential rate cut had minimal impact on the Mexican peso. Supported by the significant interest rate differential between Mexico and the US, the peso remained steady at 16.88 to the US dollar.
A significant factor in the February inflation drop was the decline in agricultural product prices (fruits, vegetables, and meat). Their annual inflation rate fell to 4.77% (from 9.75% in January). Meat prices even decreased by 3.23% year-over-year, while fruit and vegetable inflation dropped to 15% (from nearly 22% in January). This month-on-month decrease is attributed to improved supply after difficult climate conditions in key Mexican states. Prices for tomatoes, for instance, saw an almost 42% reduction compared to January.
Inflation wasn’t entirely down across the board however. Processed food, beverages, and tobacco inflation moderated slightly (5.25% vs. 5.54% in January). Overall goods inflation also edged down (4.11% vs. 4.37% in January). But the annual inflation rate for services rose to 5.30%, and energy prices (including gasoline and electricity) climbed to 2.75% year-over-year (up from 1.41% in January). This “continued strength of services inflation,” as noted by Capital Economics’ Jason Tuvey, suggests a more gradual easing cycle by Banxico than some might anticipate.