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    Mexico’s Stubborn Core Inflation

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    July 09, 2019

    Mexico’s core inflation remained stubbornly high in June, potentially limiting scope for policy rate cuts. Russia’s current account surplus dropped unexpectedly in Q2.

    Mexico’s headline inflation
    moderated in line with expectations in June, sliding back into the central bank’s target range of 2-4%. However, the move failed to generate a lot of excitement. The reason is that Mexico’s core inflation remains stubborn and sticky, lurking just under the upper range of the target band (see chart below). One possible explanation is that labor costs are still high despite softening domestic activity—this factor that was highlighted by the central bank in its latest communication. Given that core price pressures are broad-based (the diffusion index is extremely elevated), the dichotomy between headline and core inflation may persist for quite some time, potentially limiting scope for the central bank’s rate cuts.

    It’s been a while since we had a big downside surprise in Russia’s current account, but this is what happened in Q2. The preliminary estimate undershot consensus by a very wide margin, with the surplus falling sharply to USD12.1B. Investment income outflows explain a big part of it. The trade surplus was also smaller (reflecting a combination of higher imports and a small decline in exports), but not dramatically. Overall, Russia’s external position remains very strong, and today’s current account print is not a game-changer.

    We suspect that there was a big sigh of relief at the Hungarian central bank after yearly headline inflation dropped to 3.4% in June. The moderation came on the back of base effects and lower fuel prices. However, core inflation measures moderated as well, bringing the central bank’s accommodative policy stance a bit more in line with fundamentals. The market still believes that the next policy move will be a rate hike though, with 23bps priced in for the next twelve months. The main argument here is that domestic activity is robust, while disinflation remains highly “localized”.

    Chart at a Glance

    Mexico Inflation, class=

    Source: Bloomberg LP


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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