inflation r july - september 2010 · 2018-06-14 · world inflation remains at low levels....

October, 2010

INFLATION REPORTJULY - SEPTEMBER 2010

Outline

1. External Conditions

2. Economic Activity in Mexico

3. Inflation and Monetary Policy

4. Forecasts and Balance of Risks

5. Modifications to the Communication Scheme

3


The world economy experienced a slowdown during the thirdquarter of 2010:

Domestic demand in the major advanced economies remains weak.

In the U.S. households continue to deleverage and to adjust theirspending to sustainable levels.

The financial system remains fragile.

Emerging economies continued growing at a faster pace thanadvanced economies, although in some cases there appearedsigns of deceleration.

World inflation remains at low levels. Moreover, in someadvanced economies concerns about the possibility of deflationhave increased.

4

Gross Domestic Product(Annual % change)

Source: IMF, WEO October 2010.

1. External ConditionsWorld Trade Volume

(Index 2000=100)

Source: CPB Netherlands.

90

100

110

120

130

140

150

160

170

Jan-

00

May

-01

Sep-

02

Jan-

04

May

-05

Sep-

06

Jan-

08

May

-09

Source: CPB Netherlands.

World Industrial Production(Annualized % change over 3 months)

-30

-25

-20

-15

-10

-5

0

5

10

15

20

Jan-

00

May

-01

Sep-

02

Jan-

04

May

-05

Sep-

06

Jan-

08

May

-09

-6

-4

-2

0

2

4

6

8

10

I 200

6

IV 2

006

III 2

007

II 20

08

I 200

9

IV 2

009

III 2

010

II 20

11

WorldAdvancedEmerging

IV 2

011

Forecast

Aug

-10

Aug

-10

5

U.S.: Households’ Debt and Debt Service

(% of Disposable personal income; s.a.)

s.a./ Seasonally adjusted.Source: Federal Reserve.

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

40

50

60

70

80

90

100

110

120

130

140

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

DebtDebt service (left axis)

s.a./ Seasonally adjusted.Source: BEA.

U.S.: Households’ Saving Rate(% of Disposable personal

income; s.a.)

U.S.: Consumer Confidence(Index 1985=100)

Source: Conference Board.

0

2

4

6

8

10

12

14

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

20

40

60

80

100

120

140

160

Jan-

80A

pr-8

2Ju

l-84

Oct

-86

Jan-

89A

pr-9

1Ju

l-93

Oct

-95

Jan-

98A

pr-0

0Ju

l-02

Oct

-04

Jan-

07A

pr-0

9


Oct

-10

6

s.a./ Seasonally adjusted.Source: BEA and Federal Reserve.

U.S. : GDP and Industrial Production(Quarterly annualized % change; s.a.)

-20

-15

-10

-5

0

5

10

I 200

7

II 20

07

III 2

007

IV 2

007

I 200

8

II 20

08

III 2

008

IV 2

008

I 200

9

II 20

09

III 2

009

IV 2

009

I 201

0

II 20

10

III 2

010

GDP

Industrial Production

s.a./ Seasonally adjusted.Source: BLS.

U.S.: Non-farm Payroll and Unemployment Rate

(Change in thousands of jobs and %; s.a.)


0

2

4

6

8

10

12

-800

-600

-400

-200

0

200

400

600

800

Jan-

00Se

p-00

May

-01

Jan-

02Se

p-02

May

-03

Jan-

04Se

p-04

May

-05

Jan-

06Se

p-06

May

-07

Jan-

08Se

p-08

May

-09

Jan-

10Se

p-10

Non-farm Payroll

Unemployment rate (left axis)

7

Source: Bloomberg.

Inflation inAdvanced Economies

(Annual %)

-3

-2

-1

0

1

2

3

4

5

6

7

Jan-

06

May

-06

Sep-

06

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10

May

-10

Sep-

10

U.S.EurozoneJapanU.K.

-4

-2

0

2

4

6

8

Jan-

84

Sep-

85

May

-87

Jan-

89

Sep-

90

May

-92

Jan-

94

Sep-

95

May

-97

Jan-

99

Sep-

00

May

-02

Jan-

04

Sep-

05

May

-07

Jan-

09

Sep-

10

Headline

Core 1/

U.S.:Headline and Core Inflation

(Annual %)

1/ CPI excluding food and energy.Source: BLS


8

The degree of monetary accommodation in advancedeconomies has generated abundant global liquidity, which hasled to a search for higher yields.

This has contributed to:

Substantial capital inflows to emerging economies;

Appreciation of their currencies; and

Upward pressures on asset prices (that could even lead to“bubbles”).

All of these complicate monetary policy in emerging economies.


9

Currency appreciation can affect export competitiveness.

Some economies have taken certain steps to try to contain thisappreciation.

Nevertheless, in some cases currency appreciation reflects, atleast partially, more fundamental factors, such as an improvementin the terms of trade (e.g., an increase in the prices ofcommodities).

A widespread policy of sustained economic recovery by meansof depreciated real exchange rates (“competitivedepreciations”) is not a viable solution for the global economy.

Greater coordination among countries is necessary in order tomaximize growth in the global economy.


10

-80

-60

-40

-20

0

20

40

60

80

100

120

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

2007

2008

2009

2010


1/ The sample covers funds used for buying andselling stocks, and bonds from emerging countrieslisted in advanced economies’ markets. Flows excludeportfolio performance and exchange ratefluctuations. Source: EPFR.

Accumulated Flows to Emerging Economies (Equity and Debt) 1/

(Billions of dollars)

Weeks

0

50

100

150

200

250

Jan-

00Se

p-00

May

-01

Jan-

02Se

p-02

May

-03

Jan-

04Se

p-04

May

-05

Jan-

06Se

p-06

May

-07

Jan-

08Se

p-08

May

-09

Jan-

10Se

p-10

Commodity Prices(Index 31-Dec-02=100)

Exchange Rate in Emerging Economies vs. U.S. Dollar 2/

(Index Aug-08=100)

Source: IMF.2/ Exchange rates in relation to USD. An increase implies an appreciation.Source: Bloomberg.

60

70

80

90

100

110

120

130

Jun-

08

Oct

-08

Feb-

09

Jun-

09

Oct

-09

Feb-

10

Jun-

10

Oct

-10

BrazilChileKoreaMexicoPeru

Appreciation

Outline






12


Industrial Production Indicators(Index Jun-2008=100; s.a.)

s.a./ Seasonally adjusted.1/ Calculations by Banco de México with data from INEGI.Source: INEGI.

s.a./ Seasonally adjusted.Source: INEGI.

Economic Activity Indicators

(Index 2003=100; s.a.)


Manufacturing Exports(Index 2008=100; s.a.)

50

60

70

80

90

100

110

120

130

Jan-

06M

ay-0

6Se

p-06

Jan-

07M

ay-0

7Se

p-07

Jan-

08M

ay-0

8Se

p-08

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0Se

p-10

Manufacturing

Automotive

Others

88

90

92

94

96

98

100

102

Jan-

07M

ay-0

7Se

p-07

Jan-

08M

ay-0

8Se

p-08

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0

ConstructionIndustry without construction 1/

103

108

113

118

123

128

133

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10

May

-10

Total IGAE

Industrial production

Services

Aug

-10

Aug

-10

13



Sales in Commercial Establishments(Index 2008=100; s.a.)

Workers’ Remittances(Billion dollars; s.a.)

1.4

1.6

1.8

2.0

2.2

2.4

2.6

Jan-

06

May

-06

Sep-

06

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10

May

-10

Sep-

10

Seasonally adjusted

Trend

85

90

95

100

105

Jan-

06

Jun-

06

Nov

-06

Apr

-07

Sep-

07

Feb-

08

Jul-0

8

Dec

-08

May

-09

Oct

-09

Mar

-10

Aug

-10

Wholesale

Retail

s.a./ Seasonally adjusted.Source: Banco de México.

14


s.a./ Seasonally adjusted.1/ Includes credits for automobiles and real estate acquisition, for capitalized leasing, personal, and other consumption credits.Source: Banco de México.

Commercial Banks’ Credit to Households

(Index Dec-2006=100; s.a.)

Consumer Confidence Index(Index 2003=100; s.a.)

s.a./ Seasonally adjusted.Source: INEGI and Banco de México.

70

75

80

85

90

95

100

105

110

115

Jan-

05M

ay-0

5Se

p-05

Jan-

06M

ay-0

6Se

p-06

Jan-

07M

ay-0

7Se

p-07

Jan-

08M

ay-0

8Se

p-08

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0Se

p-10

Seasonally adjusted

Trend

70

75

80

85

90

95

100

105

110

115

120

125

130

60

70

80

90

100

110

120

130

140

150

Jan-

06

Jun-

06

Nov

-06

Apr

-07

Sep-

07

Feb-

08

Jul-0

8

Dec

-08

May

-09

Oct

-09

Mar

-10

Aug

-10

HousingConsumption (left axis)Durable goods and others (left axis) 1/

15

-20

-10

0

10

20

30

40

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Total

Credit

Issuance

2. Economic Activity in MexicoGross Fixed Investment and

Components(Index 2005=100; s.a.)


80

90

100

110

120

130

140

150

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

TotalConstructionMachinery and equipment

Total Financing to Non-financial Private Firms 1/

(Real annual % change)

13.0

13.2

13.4

13.6

13.8

14.0

14.2

14.4

14.6

14.8

Jan-

06

Aug

-06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-0

9

Feb-

10

Sep-

10

Original

Seasonally adjusted 2/

2/ Seasonally adjusted by Banco de México.Source: IMSS.

IMSS-insured Permanent and Temporary Workers in Urban Areas

(Million workers; s.a.)

1/ It includes total banking credit and the one providedby other non-banking financial intermediaries in thecountry, as well as financial credit provided bycommercial banks, bilateral, and foreign suppliers.Source: Banco de México.

Outline






17

During the third quarter, average annual headline inflationdecreased and was below the lower limit of Banco de México’sforecast interval.

This performance mainly reflects:

Currency appreciation.

A negative output gap.

Intensified competition among some retail chains.

Low levels of world inflation.

All of these elements have taken place in a context of a monetarypolicy aimed at achieving the inflation target.


18

0

1

2

3

4

5

6

7

8

9

10

I 200

6

II 20

06

III 2

006

IV 2

006

I 200

7

II 20

07

III 2

007

IV 2

007

I 200

8

II 20

08

III 2

008

IV 2

008

I 200

9

II 20

09

III 2

009

IV 2

009

I 201

0

II 20

10

III 2

010

Headline

Core

Non-core

1/ Quarterly average of annual inflation.Source: Banco de México.

Annual Inflation(Quarterly average in %) 1/


19

0

1

2

3

4

5

6

7

8

9

10

Jan-

04

Sep-

04

May

-05

Jan-

06

Sep-

06

May

-07

Jan-

08

Sep-

08

May

-09

Jan-

10

Sep-

10

Merchandise

Food

Others

0

1

2

3

4

5

6

7

8

9

10

Jan-

04

Sep-

04

May

-05

Jan-

06

Sep-

06

May

-07

Jan-

08

Sep-

08

May

-09

Jan-

10

Sep-

10

Services

Housing

Education

Others

Source: Banco de México.Source: Banco de México.

Annual Merchandise Core Inflation(%)

Annual Services Core Inflation(%)


20

Favorable developments on inflation and its expectations havetaken place in an environment where there are no demand-related pressures on prices:

Moderate wage increases.

Unused installed capacity.

Moderate credit recovery.

So far, increases in the international prices of wheat, corn, andsugar have not affected domestic prices.


21

-8

-6

-4

-2

0

2

4

6

I 200

0

I 200

1

II 20

02

III 2

003

III 2

004

IV 2

005

I 200

7

I 200

8

II 20

09

III 2

010

GDP 2/

IGAE 3/

62

66

70

74

78

Jan-

06

Jun-

06

Nov

-06

Apr

-07

Sep-

07

Feb-

08

Jul-0

8

Dec

-08

May

-09

Oct

-09

Mar

-10

Aug

-10

Original

Seasonally Adjusted

Source: Banco de México.

Output Gap 1/

(% of Trend)

1/ The output gap was estimated using the Hodrick-Prescott (HP) method with tail corrections; see Bancode México (2009), “Inflation Report April-June,” p.69.2/ GDP of the third quarter of 2010 estimated byBanco de México.3/ Data up to August, 2010.Source: Banco de México.

Installed Capacity Utilization (%)

2

3

4

5

6

7

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep-

10

IMSS Reference Wage(Annual % change)

Source: Calculations by Banco de México with datafrom IMSS.


22

3.25

3.50

3.75

4.00

4.25

4.50

4.75

5.00

5.25

5.50

5.75

6.00

6.25

Dec

-08

Mar

-09

Jun-

09

Sep-

09

Dec

-09

Mar

-10

Jun-

10

Sep-

10

December 2010

Average 2010-Q4

Dec-092.50

2.75

3.00

3.25

3.50

3.75

4.00

4.25

4.50

4.75

5.00

5.25

5.50

Jan-

05M

ay-0

5Se

p-05

Jan-

06M

ay-0

6Se

p-06

Jan-

07M

ay-0

7Se

p-07

Jan-

08M

ay-0

8Se

p-08

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0Se

p-10

End 2011

Next 4 years

Next 5-8 years

Dec-08

Dec-09

Headline Inflation Expectations for 2011

(Annual %)

Source: Banco de México Survey.

3.00

3.25

3.50

3.75

4.00

4.25

4.50

4.75

5.00

Dec

-09

Jan-

10

Feb-

10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep-

10

Headline

Core

Non-core

Headline Inflation Expectations for 2010 1/

(Annual %)

1/ Average inflation expectations for the fourth quarterof 2010 are calculated based on monthly inflationexpectations for each of the next twelve months.Source: Banco de México Survey.

Headline Inflation Expectations (Annual %)

Source: Banco de México Survey.


23

Oct

-10

Mexico’s Yield Curve(%)

Source: Banco de México and Proveedor Integral de Precios.

Overnight Interbank Interest Rate 1/

(%)

1/ The target for the overnight interbank interest rate (Banco deMéxico’s operating target) is shown since January 21, 2008.Source: Banco de México.

0

2

4

6

8

10

12

Jan-

03Ju

n-03

Nov

-03

Apr

-04

Sep-

04Fe

b-05

Jul-0

5D

ec-0

5M

ay-0

6O

ct-0

6M

ar-0

7A

ug-0

7Ja

n-08

Jun-

08N

ov-0

8A

pr-0

9Se

p-09

Feb-

10Ju

l-10

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

1 1 3 6 1 2 3 5 10 20 30

31-Dec-09

31-Mar-10

30-Jun-10

26-Oct-10

day months years


Outline






25


During the third quarter the balance of risks associated toinflation improved. Therefore, the forecast for annual headlineinflation has been revised downwards:

Next two quarters’ intervals were revised downwards:

• 2010-Q4: from 4.75 - 5.25% to 4.25 - 4.75% (-50 bp revision).

• 2011-Q1: from 4.50 - 5.00% to 3.75 - 4.25% (-75 bp revision).

For 2011-Q2 inflation is expected to be between 3 and 4%.

From 2011-Q3 onwards inflation is expected to convergetowards the target of 3%, bearing in mind the variabilityinterval of +/- 1 percentage point.

26

Headline Inflation Forecasts(% Quarterly Average)

Source: Banco de México.

0

1

2

3

4

5

6

III20

09

IV 2

009

I 201

0

II 20

10

III 2

010

IV 2

010

I 201

1

II 20

11

III 2

011

IV 2

011

I 201

2

Observed Inflation

Previous Forecast

2010-Q3 Inflation Report Forecast

…


27

The inflation forecast is subject to risks:

The growth rate of public sector prices and tariffs. (↑)

The possibility of a reversion of the effects of greater competitionamong retail chains. (↑)

Abrupt changes in the exchange rate. (↑↓)

Volatility of the international prices of grains. (↑↓)

Higher downside risks on economic activity. (↓)

High degree of volatility of fruit and vegetable prices. (↑↓)


-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

2007

2008

2009

2010

f

2011

f

28

Between 3.2 – 4.2

Around 5.0

12.0

12.5

13.0

13.5

14.0

14.5

15.0

15.5

2007

2008

2009

2010

f

2011

f

Between 575 and 675thousand jobs

Between 500 and 600 thousand jobs

-2.0

-1.5

-1.0

-0.5

0.0

2007

2008

2009

2010

f

2011

f

Gross Domestic Product(Annual % change)

IMSS-insured Workers(Million)

Current Account(% of GDP)

f/ Forecast.Source: INEGI and forecast of Banco de México.

f/ Forecast.Source: IMSS and forecast of Banco de México.

f/ Forecast.Source: Banco de México.


29

The Mexican economy faces the challenge of generating growthrates that will lead to a greater level of development.

Macroeconomic policy plays a fundamental role.

Nevertheless, it needs to be complemented by an incentivestructure that leads to gains in productivity.

Public policies that could have a favorable effect:

Increasing the degree of competition in input and final goodsmarkets.

Flexibility in the labor market.


Outline






31

Publication of Minutes of the Board of Governors’ meetingsregarding monetary policy decisions from 2011 onwards.

The number of predetermined monetary policy announcementdates will be reduced from 11 to 8 in 2011.

Changes in the format used to publish inflation and economicactivity forecasts. Starting from the next Inflation Reportonwards, these forecasts will be published using “Fan Charts”.


32

Publication of Minutes

The publication of Minutes will contribute to increase thetransparency of the Central Bank and to be in line with the bestpractices in these matters.

Information on the monetary policy decision-making process willbe provided, in particular on the factors that influence thedecisions of the members of the Board.

The Minutes will be released 10 working days after theannouncement of the monetary policy decision.


33

Reduction in the Number of Predetermined Monetary PolicyAnnouncement dates

Considering that inflation has converged to low and stable levelsduring recent years, the number of predetermined dates toannounce monetary policy decisions will be reduced from 11 to 8in 2011.1/

The Central Bank will be publishing information on monetarypolicy during all of the months of 2011 through theabovementioned announcements, the Minutes and/or theInflation Reports.

Indeed, although the number of monetary policy announcementsduring the year will be reduced, the amount of informationreleased to the public will increase.

1/ As in previous years, the Board of Governors reserves the right to announce changes in the monetary policy stance at dates different tothose previously scheduled, in the case of extraordinary events or situations requiring the Central Bank’s intervention.


Calendar for 2011

1/ The Inflation Report that will be published on February 9, 2011 corresponds to 2010-Q4, the one to be published on May11 to 2011-Q1, the one to be published on August 10 to 2011-Q2, and the one to be published on November 9 to 2011-Q3.

MonthAnnouncement of the

Monetary Policy Decision

Minutes of the Board of Governor's Meetings

Regarding Monetary Policy Decisions

Inflation Reports 1/

January 21February 4 9March 4 18April 15 29May 27 11June 10July 8 22August 26 10September 9October 14 28November 9December 2 16


35

Changes in the format of forecast publications

Starting from the next Inflation Report onwards, the forecasts ofinflation and economic activity will be published using “FanCharts”.

Advantages of using these graphs:

They illustrate the uncertainty associated to the forecastedvariable.

They explicitly indicate the probability with which the forecastedvariable is expected to lie within different intervals.

They reflect the fact that the longer the forecast horizon, thegreater the uncertainty of the estimates.

Their use is considered a best practice among central banks.


36

T1 T2 T3 T4 T5 T6 T7 T8 T9 T10

T11

T12

Fan Chart Example for a Particular Variable


inflation r july - september 2010 · 2018-06-14 · world inflation remains at low levels....

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