Mexico inflation inches higher in early February, core prices remain elevated

Mexico's annual inflation rose to 3.92% in the first half of February, slightly above economists' expectations, while core inflation climbed to 4.52%, remaining well above the central bank's 3% target range. The data reduces the likelihood of an interest rate cut at the next policy meeting after Banxico's pause earlier this month.

Key Points

Annual headline inflation rose to 3.92% in the first half of February, up from 3.77% in early January and slightly above the 3.89% Reuters consensus.
Core inflation climbed to 4.52% year-on-year in early February, remaining above Banxico's 3% target range.
The data reduces the near-term probability of an interest rate cut after Banxico unanimously held its policy rate at 7% on February 5, the first policy pause since mid-2024. Sectors most directly affected include financial markets, fixed-income instruments, and interest-rate-sensitive industries such as housing and consumer credit.

MEXICO CITY, Feb 24 - Mexico's annual inflation rate for the first half of February registered 3.92%, official figures released on Tuesday showed, a touch higher than the 3.89% forecast by economists surveyed by Reuters. The reading represents an increase from the 3.77% recorded in the first half of January, extending a recent upward trajectory in consumer prices.

Core inflation - the measure that excludes selected volatile food and energy components - rose to 4.52% in the 12 months through early February, up from 4.47% in early January, according to the national statistics agency. That rate sits further above the Bank of Mexico's 3% target, plus or minus one percentage point.

The persistence in core prices complicates the outlook for monetary easing. Policymakers at the central bank unanimously decided on February 5 to maintain the key interest rate at 7% - the first pause in the cycle since mid-2024 - and the latest inflation readings reduce the room to move toward lower rates next month.

Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, characterized the data as offering only limited scope for further normalization of monetary policy in the second quarter. "These data provide limited - but tangible - room for Banxico to continue normalizing monetary policy in Q2," he said. "For now, action next month looks constrained."

The upward movement in headline and core inflation is likely to remain a focal point for markets and policymakers in the near term. The combination of slightly stronger-than-expected headline inflation and a stubborn core measure suggests that the central bank will weigh these developments heavily when considering the timing and scale of any future policy adjustments.

While the recent pause signaled a potential shift in the pace of policy moves, the incoming price data has tempered immediate expectations for easing. Observers will be watching subsequent releases to assess whether the trend continues or if inflation pressures show signs of receding back toward the target range.

Risks

Persistently elevated core inflation could delay monetary easing, increasing borrowing costs for households and businesses in interest-rate-sensitive sectors.
Stronger-than-expected headline inflation may prompt volatility in bond and foreign exchange markets as traders reassess Banxico's policy trajectory.
If inflation continues to run above the target range, consumer-facing sectors could face margin pressure if price adjustments are constrained or demand softens.

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