Tariffs and Taxes Hit the Shopping Basket
Mexico’s inflation accelerated more than expected in early February as new taxes and tariffs work their way through the economy. Consumer prices rose 3.92 percent in the first two weeks of February year-on-year, statistics institute INEGI reported Tuesday — above the median Bloomberg estimate of 3.89 percent and up from 3.82 percent in late January.
The main culprits are identifiable: cigarettes surged 14.5 percent after a new excise tax, sugary drinks climbed on similar levies, and a range of consumer goods felt the impact of tariffs Mexico imposed on Asian imports starting January 1. Those tariffs — designed to protect domestic manufacturing from a flood of cheap Chinese goods — raised duties on products ranging from textiles to steel, with rates reaching as high as 50 percent on some categories.
Core inflation, which strips out volatile food and energy prices, eased slightly to 4.52 percent from 4.56 percent — below the 4.57 percent analysts had expected. But the number still sits well above Banxico’s 3 percent target, and the central bank’s own models suggest it will remain sticky through mid-year as the tariff pass-through works its way across supply chains.
Why Banxico Hit Pause
The data reinforces Banxico’s decision on February 5 to pause rate cuts for the first time since March 2024, holding the benchmark at 7 percent after 12 consecutive reductions from a peak of 11 percent. The easing cycle, which began nearly two years ago as inflation appeared to be converging toward the 3 percent target, had been one of the most aggressive in Latin America — cutting 400 basis points in under 18 months. The board majority described the tariff impact as “temporary and limited,” but acknowledged the uncertainty warranted caution. The vote was 4-1 in favor of holding.
Deputy Governor Jonathan Heath cast the lone dissent — not because he wanted a cut, but because he wanted stronger language. Heath argued the bank’s inflation forecasts lack credibility and that any cut in coming meetings would be “premature.” He questioned the board’s characterization of the balance of risks as “more balanced,” warning that upside inflation pressures from tariffs and fiscal measures are being underestimated.
A Target That Keeps Moving
Banxico has pushed back its timeline for reaching the 3 percent target to the second quarter of 2027 — a full year later than its previous estimate of the second quarter of 2026. The delay reflects tariff uncertainty, the peso‘s vulnerability to shifts in U.S. monetary policy and trade rhetoric, and weak domestic growth: GDP expanded just 0.5 percent in 2025, the slowest pace since the pandemic year.
Stuck Between Two Crises
Analysts at Itaú expect cuts to resume only in May, with a terminal rate of 6.75 percent by year-end — a shallower cycle than markets had priced in before the tariff shock. Societe Generale sees a similar trajectory, penciling in 25 basis point reductions in each half of the year, contingent on inflation cooperating. The broader picture is one of a central bank caught between an economy that desperately needs easing and prices that will not cooperate. Manufacturing activity has contracted for months, consumer confidence is fragile, and the USMCA trade agreement faces a 2026 review that injects additional uncertainty into investment decisions. Mexico’s export sector, which accounts for roughly 40 percent of GDP, remains deeply tied to U.S. demand — and any escalation in trade tensions between Washington and Mexico City could weigh further on growth. For now, Banxico has chosen to wait — betting that the price shock is temporary even as the evidence for that bet grows thinner with each inflation reading.