Mexico's inflation is tame. The real worry is that nobody is investing

MEXICO'S inflation has been brought to heel, and that is a cause for celebration. Annual headline inflation fell to 3.1% in early July, according to the national statistics agency, INEGI, the lowest figure since December 2020. Core inflation - which strips out volatile food and energy prices - touched 3.95%, back inside the Bank of Mexico's target band of 3% plus or minus one percentage point. The central bank, Banxico, has ended its easing cycle, having cut its benchmark rate by four percentage points through late 2025 before reducing it to 6.50% in May. The Mexican peso has strengthened 8% over the past year, trading near 17.3 to the dollar.

It is tempting to read these numbers as evidence of a landing. In February Banxico raised its 2026 growth forecast to 1.6% from 1.1%, encouraged by a resilient fourth quarter of 2025. The OECD upgraded its own projection to 1.4%. Analysts, too, lowered their inflation forecasts while raising their growth outlooks. The narrative of a country conquering inflation without sacrificing growth is tidy. The evidence does not support it.

The trouble is that Mexico's disinflation has been achieved not by prudent policy alone but by an economy too weak to generate price pressure. GDP contracted by 0.8% in the first quarter of 2026. Gross fixed investment has fallen for 17 consecutive months on an annual basis. In February it shrank by 4.2% year on year, led by a 9.7% plunge in machinery and equipment, while private investment fell 5.4%. The 2025 full-year figure was a 6.7% contraction, a reversal from a 3.4% increase in 2024 and a 19.7% surge in 2023, when nearshoring-driven capital inflows were at their peak. The nearshoring boom has not translated into sustained domestic capital formation.

This matters because an economy that depends on cross-border manufacturing - and 80% of Mexico's exports go to the United States - cannot afford a prolonged investment drought. The nearshoring thesis, which has underpinned much of the excitement about Mexico since 2020, was that companies would move supply chains closer to the American market and build factories, hire workers and expand the tax base. That has happened in pockets. But the broader picture is of caution, delay and retrenchment.

The incentives for restraint are easy to see. The United States has imposed new tariffs on imports from roughly 60 economies. Goods complying with the US-Mexico-Canada Agreement, or USMCA, remain exempt, which preserves Mexico's advantage over rivals such as China, which now faces effective tariffs of around 22% on US imports, compared with Mexico's weighted average of about 3.4%. But the USMCA itself is in jeopardy. On 1 July the United States announced it would not renew the agreement in its current form, preferring annual reviews until 2036. The deal stays in force for now, but companies facing multi-year capital commitments are not inclined to sign cheques while the rules of the road are being rewritten. As Chatham House, a thinktank, put it, the Trump administration's volatile policies intertwining trade and security add to the complexity of these negotiations.

President Claudia Sheinbaum's administration knows this. In May she signed decrees fast-tracking investment approvals for projects above 2bn pesos within 30 days and consolidating 132 foreign-trade procedures into a single platform. The government's aim is to reduce regulatory friction. That is a sensible move. But it addresses the symptom, not the disease. The disease is uncertainty about whether the investment will be protected by trade rules five years from now.

To be sure, Mexico retains structural advantages that justify patience. It is the United States' largest trading partner and ranks between first and third for 36 of the 50 states. Migration flows across the border have fallen dramatically, from more than 2 million encounters in 2022 to around 240,000 last year. The trade surplus widened to $4.1bn in June from $0.5bn a year earlier. Formal employment is improving after a weak 2025. And the peso's yield advantage - a 3-percentage-point differential with the Federal Reserve - provides a buffer against currency instability.

None of these factors compensates for a hollowing investment cycle. An economy that grows 1% to 1.6% while fixed investment contracts for nearly two years is not recovering. It is limping. The growth revisions that Banxico and the OECD issued in early 2026 were buoyed by a statistical base effect: a decent fourth quarter in 2025 makes the first half of 2026 look better by comparison. But BBVA Research, one of Mexico's leading private-sector economic research units, has since cut its own 2026 growth forecast from 1.8% to 1.2%, citing weak domestic demand and prolonged uncertainty. S&P Global downgraded Mexico's outlook to negative in May, warning of weakening fiscal flexibility.

The deeper question is not whether inflation will reach target. It almost certainly will, given the absence of demand-pull pressures. The deeper question is whether a period of benign inflation masks a structural weakening of the factors that made Mexico attractive in the first place. The disinflation is real and welcome. But it is of the sort that a depressed economy produces, not the sort that a well-managed one engineers. That distinction matters when investors and policymakers are deciding whether to commit capital or cut rates.

Banxico has held the policy rate at 6.50% since May, at what it considers the midpoint of its estimated neutral range. That is a prudent stance. The central bank can afford to wait and see whether the investment cycle turns. But the government should recognise that regulatory fast-tracking, helpful as it is, cannot substitute for trade certainty. The first task in the USMCA renegotiation should be clarity on rules of origin and tariff treatment, not the pursuit of secondary concessions on labour standards or environmental clauses, important as those are.

Mexico's inflation problem is solved. Its growth problem is just beginning to show.