Inflation reaches its lowest point since February 2021

Mexico’s annual headline inflation rate declined in December to its lowest level since February 2021 while core inflation increased slightly, the national statistics agency reported Thursday.

In its most recent report, the national statistics agency INEGI found that the annual headline rate was 4.21% in December, down from 4.55% in November. It was the second consecutive month that headline inflation fell.

The 4.21% inflation reading in December was the lowest end-of-year rate since 2020, and below the 4.22% and 4.28% median estimates of economists surveyed by Bloomberg and Reuters, respectively.

The annual core inflation rate, which excludes volatile food and energy prices, increased to 3.65% in December from 3.58% in November. The increase broke a 22-month streak of annual core inflation decreases.

The 3.65% core inflation reading was just above the median estimates of economists.

INEGI also reported that consumer prices increased 0.38% in December compared to the previous month.

Felipe Hernández, a Latin America economist at Bloomberg, said that the inflation data for December adds “evidence that upward pressure on prices from supply shocks, increasing costs and excess domestic demand is fading.”

“We expect the inflation rate to continue slowly falling this year, though accumulated peso depreciation and persistent inflation expectations may limit the decline,” he said.

Gabriela Siller, director of economic analysis at Mexican bank Banco Base, said on X that the decline in inflation in December is “good news,” but added that it was the result “in part” of the economic slowdown in Mexico.

Inflation for fruit and vegetables drops 10 points in the space of a month 

INEGI’s data shows that fruit and vegetables were 6.05% more expensive in December than in the same month of 2023. Inflation for those products fell 10.76 points compared to November, when the reading was 16.81%.

Adverse climatic conditions were a major factor in high prices for fruit and vegetables last year, but the inflation rate in December indicates that the situation in the agricultural sector improved in late 2024. Prices for fruit and vegetables fell 2.82% in December on a month-over-month basis.

The annual inflation rate for all agricultural products, including meat, was 6.57% in December, down from 10.74% in November.

Annual inflation for services in December was 4.94%, while processed food, beverages and tobacco were 3.60% more expensive than a year earlier. The cost of non-food goods rose 1.33% annually while energy prices, including those for gasoline and electricity, increased 4.97%.

Will the Bank of Mexico cut interest rates again next month?

The annual headline inflation rate remained above the Bank of Mexico’s 3% target in December. However, the governing board of the central bank — which officially tolerates a 2-4% inflation range — demonstrated last year that it was prepared to cut its benchmark interest rate while the headline rate remained above 3%.

Banxico, as the bank is known, cut its key rate on five occasions last year, lowering the rate by a total of 125 basis points to 10%. The bank indicated that the ongoing decline in core inflation was a significant factor in the decision to cut rates.

The El Economista newspaper reported Thursday that the latest headline inflation data provides room for Banxico to continue its easing cycle, and noted that future interest rate cuts could be even bigger than the 25-basis-point reductions in 2024.

Announcing a 25-basis-point cut on Dec. 19, Banxico said that “in view of the progress on disinflation, larger downward adjustments could be considered in some [monetary policy] meetings [in 2025].”

The central bank also said that headline and core inflation were “foreseen to follow a downward trend” in the near future, a prediction that didn’t prove to be correct in the case of core inflation in December.

The bank’s governing board will hold its next monetary policy meeting on Feb. 6.

Kimberley Sperrfechter, an Emerging Markets Economist at Capital Economics, anticipates a 25-basis-point cut next month rather than a 50-basis-point one.

“Given heightened uncertainty around U.S. President-elect Trump’s policies and with core services inflation still uncomfortably strong, we think it’s more likely that Banxico will deliver another 25bp interest rate cut, to 9.75%, at next month’s meeting,” she wrote in a note.

With reports from El Economista, El Financiero and Bloomberg