Inflation Drops to 3.57% in October; Banxico Maintains Cautious Stance Ahead of December Decision
Mexico’s headline inflation eased in October to an annual rate of 3.57% after two consecutive months of increases, according to data from INEGI. The result was in line with consensus expectations and reinforces the perception that price pressures have continued to subside, albeit unevenly. Core inflation—which excludes energy and agricultural products—held at 4.28%, still above the Bank of Mexico’s (Banxico) 3% ±1 percentage point target, suggesting that the disinflationary process is ongoing but yet to be completed.
In this context, Banxico cut its policy rate by 25 basis points to 7.25% in its latest announcement and left the door open for further cuts, although with a more cautious forward guidance. Since reaching a high of 11.25% at the start of 2024, the central bank has lowered rates by 400 basis points in a cycle of twelve moves. The more cautious tone signals that the Governing Board will take a more measured approach to the size and timing of future easing heading into December, paying close attention to core inflation trends, the formation of expectations, and external conditions.
October’s slowdown reflected lower pressures in some energy prices and a moderation in certain food items, while services continued to show resilience tied to labor costs and rising rents and restaurant prices. This pattern is consistent with slower disinflation in the core component, which typically responds to changes in demand and financial conditions with a lag.
With the rate at 7.25%, monetary policy remains restrictive in real terms, helping to anchor expectations and support financial stability. The exchange rate has experienced bouts of volatility amid higher global rates and shifting risk appetite, but the rate differential with advanced economies—combined with domestic factors—has helped moderate sharper moves. For households and businesses, borrowing costs have started to ease gradually, though they remain above pre-pandemic averages.
On the macroeconomic front, activity continues to be mixed: domestic consumption is still supported by formal employment and higher wages, while industry depends on the U.S. manufacturing cycle. Expectations of increased investment linked to nearshoring remain a key support for domestic demand, especially in northern and Bajío regions; however, fully realizing these projects faces bottlenecks in energy, logistics, and permitting, which could affect costs and the price trajectory if not addressed in a timely manner.
Key inflation risks include the possible persistence of service-sector inflation, new cost pressures from wages, and potential supply shocks in agricultural products tied to weather and droughts. Externally, oil prices, the path of U.S. monetary policy, and geopolitical uncertainty could trigger bouts of financial volatility. While inflation expectations have moderated from their 2022–2023 peaks, they remain slightly above target over one- to two-year horizons, reinforcing the need for caution.
Looking ahead to the December decision, the market sees an additional rate cut as possible if core inflation confirms a downward trend and expectations remain anchored; however, any move will likely be incremental and data-dependent. Overall, the combination of headline inflation closer to the target range and still-elevated core readings suggests that the end of the easing cycle could be longer and more gradual than initially anticipated.
In short, October’s inflation numbers offer a positive signal, but the persistence of core pressures requires Banxico to manage cuts cautiously. The short-term outlook will depend on the resilience of the services sector, external developments, and the economy’s ability to absorb investment without generating excess demand pressures. The baseline scenario continues to be one of gradual disinflation with restrictive monetary policy for an extended period.
