Inflation drops to 3.94% in May on electricity subsidy, but core inflation keeps pressuring Banxico

Seasonal electricity relief brought inflation back into the target range, while services and processed foods keep core inflation above 4%.

Inflation in Mexico returned to the Bank of Mexico (Banxico) target range in May, but it did so more because of temporary relief in volatile components—especially energy and administered prices—than because of a clear, sustained easing in underlying pressures. The National Consumer Price Index (INPC) posted a 3.94% annual increase and a 0.21% monthly decline, according to INEGI, outperforming market consensus expectations.

The headline reading cooled thanks to the non-core component, which fell 1.65% month over month, driven by a sharp drop in electricity. That move reflected the start of warm-season electricity subsidies in several cities across the country, a recurring feature of Mexico’s inflation calendar. In May, electricity prices fell 17.88% on the month, making it the item with the largest downward contribution to the headline index.

However, the underlying message for monetary policy is more complex: core inflation—which excludes energy and agricultural products and typically guides Banxico decisions because it better reflects the medium-term trend—came in at 4.19% year over year and rose 0.22% month over month. Services, in particular, held at a 4.57% annual rate, while processed food, beverages, and tobacco rose 5.13% year over year—both still well above the central bank’s 3% point target.

In the details, declines in some agricultural items and fresh foods also helped, including tomatillo, eggs, limes, and serrano peppers. On the other side, pressures persisted in everyday goods and services: potatoes, LP gas, chicken, corn tortillas, and out-of-home consumption—restaurants, casual eateries, and taco shops—were among the categories with the biggest upward push, a reminder that household budgets are still feeling increases in essential goods and in services tied to domestic demand.

Core inflation and the rate dilemma: “pausing” cuts without declaring victory

Headline inflation’s return to the target interval (3% +/- one percentage point) strengthens the case for Banxico to keep a cautious tone after the rate cuts it began in 2024, but core inflation staying above 4% limits room to speed up further adjustments. In Mexico, the services component is especially sensitive because it often reflects labor costs, rents, transportation, and other sticky items; when that inflation is slow to come down, the disinflation process tends to be slower. And while inflation has eased from its 2022–2023 highs, uneven performance across categories suggests that the “fine-tuning” needed to bring core inflation to levels consistent with the target could take longer than bringing down headline inflation, which often benefits from favorable shocks in energy or agricultural products.

Looking ahead, the market is already pricing in the possibility of a rebound in June due to base effects and the partial reversal of some seasonal factors, with estimates pointing to positive monthly prints for both headline and core inflation. This pattern—temporary drops followed by a bounce—is common when disinflation relies on highly volatile components, so the debate centers on whether the underlying process will keep gradually converging or stall around the 4% area.

The outlook also intersects with structural factors: an economy that has shown resilience in formal employment, adjustments in input and transportation costs, and a services dynamic that in major cities often sustains price increases on the back of demand. Add to that contained but relevant risks from events with localized impact, such as the 2026 World Cup, which could create temporary pressure on lodging, restaurants, and mobility in host cities like Mexico City, Guadalajara, and Monterrey—without necessarily moving the national needle, but still lifting prices in specific segments.

In sum, May brings good news for headline inflation, but it doesn’t remove the need for caution: much of the relief came from electricity and other volatile categories, while the inflation “core” remains firm. For Banxico, the challenge is to calibrate monetary policy without overreacting to a seasonal drop, keeping the focus on the path of core inflation and on services, where the more durable convergence toward the target will be decided.