I have dedicated this space in the last four weeks to comment on aspects that seem very relevant to me both regarding the economic growth of our country, as well as the dynamics of inflation and the response of the Bank of Mexico to it. I believe that both the relevance of the topic, as well as the intensity around the events and the publication of data, deserve it. In this sense, last week the INEGI released the Consumer Price Index (INPC) for the first half of August and the Bank of Mexico published the minutes of its monetary policy meeting on August 10. Likewise, this week INEGI will release the revised GDP figure for the second quarter of the year (“traditional estimate”) and Banco de México will publish its Quarterly Report. In short, inflation continues to decline, but not as fast as it had been. Part of this is explained by the strength of the Mexican economy and this will mean that the Bank of Mexico will not be able to relax monetary policy as quickly as most participants in the local and global financial markets anticipate.
Regarding annual inflation, it decreased from 4.8. percent in the second half of July, to 4.7 percent in the first two weeks of August. For its part, underlying inflation –which excludes the most volatile components and least linked to the economic cycle of Mexico (i.e. energy, agricultural products and tariffs controlled by the government)– fell from 6.5 percent in the second half of July to 6.2 percent in the first half of August. Headline inflation reached its most recent peak in the second half of August last year at 8.8 percent, while core inflation did so in the first half of November 2022 at 8.7 percent. So there is no doubt that inflation has been falling substantially. However, as I mentioned, in this last data it is already doing it at a lower speed.
This decrease in the speed of disinflation has to do with two structural factors, in addition to an arithmetic effect of the basis of comparison. On the one hand, that the components that must respond to the monetary restriction (eg services) continue to contribute to inflation in a similar way to last year, in which the highest inflation in twenty years was observed, and on the other, that the prices of fresh fruits and vegetables and energy –mainly LP gas–, which had helped to lower inflation significantly, they are not only decreasing, but they are growing. For example, the contribution of the dynamics of the prices of services to general inflation in the first half of August was 7.7 base points (0.077 percentage points), while that of last year was 7.3 base points. In particular, tuition fees had an incidence of 4.7 base points (bp) in this last data, while in this same period in 2022 it was 3.3 bp. This means that schools and universities are being able to pass on higher prices to consumers, even more than last year. Normally this happens when the economy is seeing good growth.
Likewise, energy prices, which had been contributing negatively in most of the fortnights of this year (-5 bp average per fortnight), are now having a positive impact (+10 bp in the first half of August). In line with this, the positive contribution of the non-core component may be accentuated in the remainder of the year in agriculture due to the fact that the war agreement between Russia and Ukraine to export grain was not renewed a few weeks ago and due to the effects of the weather phenomenon of “El Niño” (“The Economic Dangers of El Niño and La Niña”, August 22).
Regarding economic growth, it is very likely that this week we will see a quarterly GDP growth rate of 1.0 percent, slightly up from the first release (“preliminary estimate”) of 0.9 percent almost a month ago. I have no doubt that we will observe robust economic growth, mainly driven by the service sector –on the aggregate supply side–, as well as by private consumption, on the aggregate demand side, as I have previously commented (“The economy mexicana continues to take flight”, August 1).
Thus, in terms of monetary policy, I believe that the Bank of Mexico sent a very restrictive message (or in financial jargon, “hawkish”, de falcón) in the minutes of the meeting of August 10, which he published last week. Although a member of the Governing Board (member #1), no longer commented that “it is still too early to consider the possibility of cuts”, as he did in the minutes of the previous meeting (June 22) and that was can be interpreted as “dovish” (dove in Spanish, which is interpreted as lax), another member (member #3) flatly removed from his argument the conditions under which he thought Banxico should start adjusting the reference rate downwards (“hawkish”). But even more important, in my opinion, the majority of the members considered that it would be necessary to continue communicating that the current level of the reference rate (11.25 percent) should be maintained for a “prolonged period”. Even member #2 commented on “…the advisability of keeping the monetary stance in restrictive territory throughout the planning horizon…”. This means that this member ruled not to cut the rate in the next 24 months. We are going to see this week the most up-to-date messages from the Governing Board both in its Quarterly Report, and in the press conference that accompanies it. My conclusion, as I have been saying for several months, is that there will be no interest rate cuts this year.
* The author is Chief Economist for Latin America at Barclays bank and member of the Committee for Dating Cycles of the Mexican Economy.
* The opinions expressed in this column are personal.