"Mexican Inflation Likely Picked Up in February -- Market Talk"

In the ever-evolving landscape of global economics, Mexico's inflation trends have once again taken center stage. As of early February 2025, the consumer price index (CPI) in Mexico has shown a notable uptick, rising by 0.15% from the end of January. This increase, while modest, is significant when compared to the 0.10% decline observed in the same period last year. The core CPI, which excludes volatile items like fruit and vegetables, has also seen a rise of 0.27%, with services and nonfood goods contributing to this increase. This trend is a clear indicator that inflationary pressures are building, and the Bank of Mexico is closely monitoring the situation.

The Bank of Mexico, in response to these inflationary pressures, has already taken steps to ease monetary policy. On February 6, 2025, the central bank cut its benchmark interest-rate target by half a percentage point, bringing it down to 9.5%. This move is part of a broader strategy to stimulate economic activity, but it also comes with risks. The Bank of Mexico's inflation target range is 2% to 4%, and the recent inflation rate of 4.21% in December 2024 is approaching the upper end of this range. Further monetary easing could exacerbate inflationary pressures, especially given the government's high spending levels. The 2024 federal budget projects government spending rising to 26.4 percent of GDP, with social programs representing about 50 percent of the total budget. This could lead to higher inflation expectations and risk premia, as seen in the larger and more volatile inflation risk premia in Mexico compared to Canada and the United States.



The nearshoring trend, driven by U.S. tariffs and supply chain disruptions, has significantly influenced Mexico's manufacturing sector and overall economic performance. This trend involves the relocation of company operations and supply chains from overseas, particularly from China, to North America, with Mexico being a primary beneficiary. The nearshoring trend has led to an increase in Mexico's manufacturing exports to the U.S. Firms that are part of the Mexican government’s Manufacturing, Maquila and Export Services Industry Program (IMMEX) and are part of global value chains have increased exports to the U.S. in skill and technology-intensive industries. These industries include chemicals, computers, aircraft, and automotive. Overall, IMMEX firms are exporting more final goods, which indicates a strengthening of Mexico's manufacturing capabilities.

Research by Mexico’s central bank found that after June 2020, manufacturing industries prone to relocating operations to Mexico from China, such as electric and electronic components, office equipment, and machinery and equipment, have exhibited higher levels of production and employment than other firms. This suggests that the relocation process is slowly occurring in regions that traditionally receive greater flows of foreign direct investment, areas in the north and central parts of Mexico.

The nearshoring trend has the potential to significantly benefit Mexico’s economy and deepen the U.S.–Mexico economic partnership. Higher U.S. tariffs on goods from China and U.S. industrial policy favoring North American production and inputs have helped reshape some global value chains in ways that may benefit Mexico. Supply-chain dislocation during the pandemic has also lent urgency to the idea of derisking supply chains by bringing them closer to their ultimate destination, generally the U.S.

Mexico surpassed China as the main manufacturing trading partner of the U.S. in 2022 and was the principal trading partner in 2023. If this trend continues, it will produce positive economic spillovers within Mexican manufacturing, expanding into the services sector and contributing to higher growth levels in 2024 and beyond. Recent Georgetown University research shows that before 2022, nearshoring had increased Mexico GDP around 1 percent. The rise is in part attributable to higher exports of computer and peripheral equipment, semiconductors and other electronic components. Georgetown researchers estimate a 0.8 percent GDP increase in the succeeding years. When adding up the effects, nearshoring could bring an overall increase of almost 2 percent to Mexico’s GDP.

In terms of investment opportunities, the nearshoring trend presents several avenues for investors. The relocation of manufacturing operations to Mexico creates opportunities for investment in infrastructure, technology, and human capital to support the growing manufacturing sector. Additionally, the increased demand for skilled labor and technology-intensive industries presents opportunities for investment in education and training programs to develop a skilled workforce. Furthermore, the potential for higher GDP growth and increased manufacturing exports to the U.S. creates opportunities for investment in Mexican stocks and bonds, as well as in companies that are part of the IMMEX program.

In conclusion, the recent increase in Mexico's inflation rate, particularly in core goods and services, poses challenges to the economic outlook by potentially influencing monetary policy and increasing the cost of doing business. However, sectors benefiting from nearshoring trends may continue to attract investment, presenting opportunities for growth. Investors should closely monitor the Bank of Mexico's actions and adjust their strategies in response to any changes in monetary policy, such as further interest rate cuts or changes in the inflation target range. The nearshoring trend, driven by U.S. tariffs and supply chain disruptions, has significantly influenced Mexico's manufacturing sector and overall economic performance, presenting several investment opportunities for those willing to navigate the complexities of the Mexican market.