Despite the introduction of price controls in early August, liquefied petroleum gas (LPG) prices rose 2.3% in the first half of September compared to the second half of August, analysts telling BNamericas expect a reaction from the central bank in the form of a rate hike.

The LPG surge contributed to another upside surprise for inflation, with the annualized rate hitting 5.87% in mid-September from 5.59% for August as a whole.

The core inflation rate fell from 4.78% to 4.92% in the same comparison.

“The most recent inflation data confirms that there are inflationary pressures, particularly in the core part, which was around 4% at the start of the year and then steadily rising since May, moving away more and more of the [central bank’s] 3% [inflation] target, ”Gabriela Siller, chief economic analyst at Mexican bank Banco BASE, told BNamericas.

Another local bank Banorte said in a research note that the acceleration in core inflation was contrary to its outlook before the release of data from the National Statistics Agency (INEGI), and that the increase in 0.42% of the bi-weekly comparison “was much higher than the consensus at 0.28%, and at our 0.29%.


After “small or small” increases in LPG prices over the past fifteen weeks, the latest reading was stronger, Siller said. “This was to be expected because the controls generate scarcity and scarcity generates a black market,” she added.

“Price controls are things that tend not to work. They are a stopgap for a much bigger problem, ”Luis Gonzalí, vice president and co-director of investments at Franklin Templeton México, told BNamericas.

Gonzalí added that even central bank deputy governor Jonathan Heath – a person appointed by President Andrés Manuel López Obrador (AMLO) – recently said that they tend “to artificially reduce inflation, but that it will eventually have to increase, and that’s when the blow will strike. ”

Siller was also negative about AMLO’s plan to reduce LPG prices through the introduction of a state-owned LPG vendor dubbed Gas Bienestar, describing it as “a bad idea economically and even from a social point of view “.

Regarding the price outlook for the LPG market, Gonzalí said: “It is likely that we will see prices increase in the medium to long term, and with that the tightening of profit margins of private gas companies.

“It is likely that some will go bankrupt, and once the price controls are lifted, we will end up with a more concentrated market, and being more concentrated, it will be able to set prices at even higher levels,” he said. added.


As for the inflation table, Gonzalí said: “Inflation is expected to remain relatively high for the rest of the year. We believe the level will be around 6%. On the other hand, we should see a significant drop in the price index during the first half of 2022 to end the year around 4%.

Siller’s outlook is similar for 2021, although Banco BASE expects inflation to stay above 4% in 2022 and not fall within the central bank’s 2-4% target range until 2024.

Siller said the excuse of a negative baseline to explain the higher inflation readings seen earlier this year can no longer be used, as Mexico is already in recovery mode right now in September 2020.

Rather, the higher rate seen now is a longer term impact of the COVID-19 pandemic “with the cost of ocean freight expected to continue to rise, as well as bottlenecks in major logistics centers,” said Siller, adding that commodity prices could rise further.


Nikhil Sanghani, Latin American economist at Capital Economics, joins Siller, Gonzalí and Banorte’s analysis team to expect a central bank reaction to the latest inflation data.

The monetary authority will hold its next policy meeting on September 30.

The central bank, Sanghani said in a research note, “has indicated that it will continue to raise rates in the face of above-target inflation to keep expectations from rising.”

“That said, given the continued conciliatory attitude of board members Gerardo Esquivel and Galia Borja, who have so far resisted the increases, we doubt that [the central bank] Banxico will follow other central banks in Latin America to accelerate the pace of tightening, ”Sanghani said. “As a result, we expect another 25bp rate hike to 4.75% next week.”

Banorte agreed, saying he expected 25 basis point hikes in the three remaining monetary policy meetings this year, closing 2021 with a benchmark rate of 5.25%.

Winking at Esquivel and Borja, Banorte said: “Given other potential episodes of volatility – due to the budget stalemate in the United States, for example – we would expect the central bank of the Mexico remains cautious despite the diversity of opinions on the board.

The comment indicates a growing debate within the board given the recent wave of split 3-2 decisions in recent rate hikes, with Esquivel and Borja being the dissenting doves – both named by AMLO.

Analysts have started to suggest that the balance could move away from monetary tightening once former finance minister and close ally of AMLO, Arturo Herrera, joins the board on January 1.

“We believe Herrera will position himself as a neutral member of the board, seeking to reconcile positions within a bank that appears to be divided,” Gonzalí said, adding that more clarity would come “when he appears before the Senate during its nomination process “.

Siller also sees in the arrival of Herrera a new dynamic: “We believe that yes, Arturo Herrera will support the idea of ​​keeping the interest rate stable.

“But the [central bank] may have no choice but to follow the Federal Reserve by raising rates when it begins to do so, probably at the end of 2022, ”she added.


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