Mexico: Softer CPI backs dovish Banxico case – Societe Generale

Societe Generale analysts Dev Ashish and Brendan McKenna note that Mexico’s June inflation data surprised to the downside, with headline and core measures moving close to Banxico’s target range. They argue that weak economic activity is weighing on services and core goods prices, reinforcing disinflation. The softer inflation profile strengthens the case for a more dovish Banxico stance, though the policy rate is still expected to stay at 6.50% near term.

Disinflation bolsters easing expectations

"June inflation surprised decisively to the downside, with headline CPI falling to 3.37% yoy and core inflation to 4.03% yoy. More importantly, the second bi-weekly reading showed headline at 3.18% yoy and core at 3.94% yoy, bringing both measures close to or within Banxico’s target range and providing the strongest evidence yet that underlying inflation pressures are easing."

"Services (excluding housing and education) inflation is finally moderating, falling to 4.40%, while core goods inflation eased to 3.45%. This suggests that weak economic activity is beginning to weigh on domestic pricing power, supporting Banxico’s long-held expectation that demand weakness would eventually drive disinflation."

"Non-core inflation remains highly supportive, with falling prices of seasonal food items and livestock likely to push headline inflation even lower through July-August. We would not rule out some bi-weekly headline readings temporarily falling below Banxico’s 3.0% target."

"We now expect headline inflation to end 2026 at 3.69% yoy and 3.62% yoy in 2027, while core inflation moderates to around 3.46% next year. Future disinflation should increasingly be driven by core components, particularly services."

"The data strengthen the case for a more dovish Banxico, but not necessarily for immediate rate cuts. We retain our call for the policy rate to remain at 6.50%, though we now see a 40% probability of a 3Q26 cut and a potential 50bp easing cycle by 1H27 if inflation continues to surprise lower and the growth backdrop remains weak."