Mexico's annual inflation eased to 3.94% in May, marking its lowest level in several months and a return to Banxico's target range of 3% plus or minus one percentage point, according to the National Institute of Statistics and Geography (INEGI). The figure beat market expectations.

The reading compares favorably to April's 4.45% and exceeded analyst forecasts of 4.03%, per El Financiero. The moderation stems from falling prices in agricultural and energy products, which declined from an annual change of 5.08% to 3.10% in the non-core segment. The data matters for Mexico because convergence to Banxico's target range has reopened discussion about the direction of the benchmark interest rate, currently at 6.5% after the central bank's governing board closed its rate-cutting cycle in May. Market consensus had anticipated more modest deceleration, consistent with the trend observed since March in the non-core component.

INEGI reported the National Consumer Price Index at 145.527 points, with a monthly variation of minus 0.21%. Core inflation, which excludes the most volatile components, stood at 4.19% annually, slightly below April's 4.26% but still above the central bank's 3% target. Excélsior noted that tomatoes, potatoes, home gas, and avocados led price declines, while lemons, onions, and tourism services posted the largest monthly increases. The services basket continues to exert the most pressure on household budgets.

INEGI's next report covering the first half of June is due at month's end. Banxico's rate decision is scheduled for coming months, and markets are watching whether the slowdown in prices solidifies a pause in the monetary cycle or opens the door to further rate cuts.

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