Mexico inflation tops forecasts as Banxico trims rates and signals a pause

Inflation surprised on the upside in October

Mexico's statistics agency said consumer prices rose 3.75% from a year earlier in October. The figure beat the Bloomberg survey's 3.65% median and all 23 forecasts, following a September print of 3.45%.

Excluding volatile food and energy, core inflation measured 3.80% year over year. Economists had looked for 3.78%, and core stood at 3.75% in September.

Price gains were concentrated in a few items. Electricity surged 18.51%, air transport jumped 26.36%, tomatoes increased 9.68%, and household gas was up 3.67%.

Banxico cuts, then hints at a long hold

Last week, the central bank cut the policy rate by 0.25 percentage point in a split decision by the five member board. Alongside the move, it revised its guidance and said the current rate would probably be held for an "extended period," arguing that keeping borrowing costs steady should help inflation move toward the 3% target within a band of plus or minus one point.

That cut reignited a discussion about whether easing is coming before inflation is clearly back on a sustainable path to target. Board member Galia Borja said at a Bloomberg Línea event that the bank remains fully committed to the goal. She voted to keep rates unchanged, noting she put more emphasis on inflation risks than some colleagues, but added her dissent did not imply the cut was premature and that others had flagged the move as early as September. Borja said Banxico is "highly likely" to keep rates steady at its December meeting.

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In comments to El Financiero, Governor Victoria Rodríguez Ceja said that Banxico had been weighing a quarter point reduction since its September decision, given inflation's alignment with the bank's projections. The bank also kept its view that inflation will reach 3% in the final quarter of 2027.

What economists are watching

Felipe Hernandez of Bloomberg Economics said inflation is still within the target range and broadly in line with projections, but above the midpoint, with risks skewed higher. He pointed to food supply shocks and pricier energy despite fuel subsidies, plus rising labor costs and sticky expectations, as ongoing pressures. With the earlier boost from a stronger peso and economic slack fading, he sees little room for further declines and expects inflation to stay roughly at present levels into 2027 - inside the target band yet above the midpoint and above the bank's 3% forecast for next year.

Gabriela Siller, who serves as Banco Base's director of economic analysis, said the three board members who backed the cut opted for an optimistic stance because core inflation had been easing for months. Sounding a cautious note, she said "given the recent depreciation of the peso and inflationary pressures in the services sector, inflation was probably going to rebound," adding, "There is zero chance that inflation will reach 3% next year."

William Jackson, Chief Emerging Markets Economist at Capital Economics, said inflation is likely to rise in the next few months and exceed the central bank's 3.7% projection for the final quarter, for both headline and core measures.

The market angle

Output is still holding up, with GDP up 3.2% year over year in the third quarter, the fastest pace since 2023. Banxico maintains the economy is operating below potential, which should cap demand driven inflation, though continued strength could test that case. Rodríguez said activity has beaten expectations recently, but slack remains and the bank does not see demand side price pressures.

Why does that matter? Inflation is above the midpoint of the target while policy just moved lower and may stay there for a while. That mix sets the tone for Mexico bonds, cash yields, and interest sensitive corners of your portfolio as investors weigh how quickly inflation converges to target and how long Banxico stays on hold.

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