Mexico Inflation Cools, But Services Inflation Keeps Banxico Cautious

Mexico's inflation slowed slightly less than expected in early December, as reported by Bloomberg, with services prices continuing to exert upward pressure. This supports the central bank's cautious approach to interest rate cuts, as seen in their recent decision to lower borrowing costs by a quarter-point to 10%.

Official data released Monday showed consumer prices rose 4.44% in the first two weeks of December compared to the same period last year, just slightly higher than the 4.4% median estimate of economists surveyed by Bloomberg. This figure represents a slowdown from the 4.55% inflation recorded in late November. Services inflation emerged as the primary driver of price increases during this period.

Core inflation, closely watched by Banxico (Mexico's central bank), which excludes volatile items like food and fuel, accelerated to 3.62%. This slightly exceeded the 3.59% median estimate. Banxico targets inflation at 3%, plus or minus 1 percentage point.

"It's a positive data point that confirms that the moderation in economic growth and the effect of the high rates are putting a limit in inflationary pressures," said Andres Abadia, chief economist for Latin America at Pantheon Macroeconomics, to Bloomberg. "That said, pressure remains at the core level, especially in services, which invite prudence and support Banxico's cautious decision in the last meeting."

Despite the overall inflation slowdown, Banxico's board acknowledged potential risks to their outlook. Key concerns include potential trade policy shifts under US President Donald Trump, who has threatened to impose tariffs on goods imported from Mexico. These tariffs could negatively impact both economic growth and consumer price forecasts.

"The fall in Mexican inflation in the first half of December, to 4.4% y/y, gives Banxico room to continue to ease monetary policy," wrote Kimberley Sperrfechter, an emerging markets economist at Capital Economics, in a note following the data release. "But we expect Banxico to continue to cut in 25bp steps, rather than step up the pace of easing."

Banxico's post-decision statement revised its consumer price forecasts, indicating that inflation is expected to converge to the 3% target in the third quarter of 2026, as opposed to the previous forecast of the fourth quarter of 2025.

While Banxico raised its 2024 GDP estimate to 1.8%, it maintained its 2025 forecast at 1.2%, suggesting a continued slowdown in economic growth over the next few years.