Inflation increases less than expected in Mexico
The Consumer Price Index published by the INEGI this morning showed a 2.84% acceleration in its annual rate in prices in the economy during May. This is an important rebound with respect to April (2.15%), but still remained under estimates (2.97%) due to a less than expected acceleration regarding agricultural goods. On a month over month basis, inflation increased 0.38%, with a higher incidence coming from food, beverages and tobacco (1.17% monthly), and fruits and vegetables (5.88% monthly). Energy prices recorded their first rise since February, boosted by an increase in the price of gasolines (low octane, 8.11% monthly; high octane 4.53%) and LP gas (2.09%), despite a strong contraction concerning the price of electricity (-21.28%) because of the current subsidy program. For their part, agricultural goods recorded a fall in prices during the second half of May, which moderated the month over month rise and decreased the component`s contribution to the indicator. Underlying inflation increased 0.3% monthly, with prices in services practically stagnant (0.12% monthly) and a moderation regarding the increase in prices of merchandise (0.46%), especially regarding non-food goods. With this, underlying inflation set at an annual 3.64% and stayed within the current fluctuation range seen since May 2018. General price levels are still within the central bank`s objective and back up expectations of seeing greater interest rate cuts on June 25th.
Risk of deflation in Europe
Members of the European Central Bank`s Governing Board expressed their concern of a deflationary trend in the economy`s prices after COVID-19`s impacts. A deflationary scenario (contraction in prices, company margins and salaries, which tend to stifle economic activity) have turned into the ECB`s main concern in midst of the deepest recession in the continent since 1930. The recent expansion in monetary stimuli carried out by the ECB respond to the need to avoid this scenario and markets have started to anticipate a new increase in purchasing programs by the end of the year. In the 1Q20, Europe`s GDP contracted 3.1%, dragged by a collapse in household consumption and investment. In case there is no firm and sustained recovery in consumption and business and consumer confidence in the following months, it`s feared that deflationary forces may rule Europe`s economy. “The sharp drop in economic activity over the year also has a bearing on inflation”, warned Christine Lagarde, President of the ECB, in a testimony before the European Parliament yesterday. Lagarde defended the ECB`s actions in response to questions regarding the legality of the asset purchasing program in German courts and once again called on European authorities to approve a new 750 billion euro fiscal package.