Mexico’s annual inflation dipped to its lowest level in almost four years in early January, perhaps allowing for a bigger interest-rate cut at the Bank of Mexico’s Feb. 6 policy meeting.

Consumer prices rose modestly in the first two weeks of the year, with declines in fresh food prices and some services partly offsetting higher energy and core goods costs, according to new data from the national statistics institute INEGI.

Official data released Thursday showed 12-month headline inflation came in at 3.69% in the first half of January, its lowest since February 2021 and within the central bank’s target of 3% plus or minus one percentage point.

Annual inflation was below both the previous month’s 4.44% and the 3.78% forecast by economists polled by news agency Reuters.

Slowing consumer price growth is likely to provide the Bank of Mexico (Banxico) with room to cut interest rates for a fifth straight meeting. Banxico lowered its benchmark interest rate by a quarter of a percentage point to 10% in December — its fifth interest-rate reduction of 2024 — and said it could consider larger cuts at future meetings.

According to Bloomberg News, policymakers indicated that “in view of the progress on disinflation, larger downward adjustments could be considered in some meetings, albeit maintaining a restrictive stance.”

Reuters reported that the decline in inflation “was driven by lower non-processed food costs, which helped offset a slightly higher-than-expected reading in the core index.”

According to the INEGI report, core inflation — which is considered more reliable as it excludes volatile energy and food prices — came in at 3.72%, slightly above the 3.69% median estimate.

INEGI reported that fruit and vegetable costs fell 2.67%, acting as the biggest drag on inflation. Meanwhile, good prices rose 0.49% while services edged 0.07% higher. Energy prices soared 0.82%.

The Wall Street Journal noted that “increases in gasoline, cigarettes, diners and restaurants were largely offset by a drop in airfares and tourism packages after the Christmas and New Year holidays.”

A cautious approach for uncertain times

Facing the possibility of a recession or economic stagnation, some Banxico members have spoken in support of faster rate cuts, but Deputy Governor Jonathan Heath has said he preferred a more prudent approach.

In an interview with Excelsior newspaper, Heath explained his position by citing “the many challenges and risks in 2025, starting with Donald Trump.”

The uncertainty created by Trump’s threats to levy tariffs on Mexican goods and the likelihood of a pause to the U.S. Federal Reserve’s easing cycle are making some analysts cautious.

“It’s more likely that Banxico will deliver another 25 basis-point cut, rather than step up the pace of easing,” Kimberley Sperrfechter, an economist at Capital Economics, told Reuters.

According to the minutes of the Banxico’s last policy decision, there is concern about the inflationary impact of tariffs with one official warning about the potential consequences on Mexico’s economic activity just as the country is dealing with a slowdown in growth.

In the latest Citi survey published this week, 17 of 30 economists see the central bank cutting the benchmark interest rate by a quarter point to 9.75% at the February meeting, while 13 expect a half-point reduction to 9.5%.

With reports from El Economista, Reuters, Bloomberg News and Market Watch