Question 1

Why is food so dominant in Mexican inflation compared to advanced economies?

Accepted Answer

Food dominates Mexican inflation because it combines a large CPI weight with high sensitivity to both domestic demand cycles and global supply shocks. Colunga-Ramos, Chen, and Perales (2026) find food ranks first for both demand (importance 0.591) and supply (importance 0.533) in Mexico — a pattern distinct from Shapiro's (2024) U.S. benchmark where services dominate demand-driven inflation. The food-dominance pattern reflects Mexico's exposure to global commodity shocks, higher food expenditure shares in household budgets, and procyclical food demand that amplifies the demand-side contribution.

Question 2

What explains Mexico's slow disinflation since 2023 despite 725 basis points of tightening?

Accepted Answer

The services floor. Colunga-Ramos, Chen, and Perales (2026) show Mexican services contribute an average 0.555 percentage points to demand-driven inflation but correlate only 0.463 with aggregate demand inflation — high persistence, low cyclical amplitude. During 2023-2024, goods inflation fell from 8.25% to 3.19% driven by external supply normalization, but services inflation only fell from 5.01% to 4.71%, and the services demand component actually rose from 2.55% to 2.67%. The mechanism is sticky services prices combined with Mexico's tight labor market — minimum wages rose 88% in real terms from 2019-2023.

Question 3

Why does housing contribute so little to Mexican inflation despite being 18% of the CPI basket?

Accepted Answer

Housing prices in Mexico barely move. Colunga-Ramos, Chen, and Perales (2026) find housing importance scores of 0.054 (demand) and 0.018 (supply) — lowest across all five categories despite an 18.05% CPI basket weight. The correlation of housing with supply-driven inflation is slightly negative (-0.082), meaning supply shocks that contract real incomes actually dampen housing prices. The structural reasons are owner-occupied rent imputation based on slow-moving construction-cost surveys, a thin informal rental market, and weak mortgage-cost and housing-wealth channels. This housing non-response means the monetary transmission channels documented for the U.S. operate weakly in Mexico.

Question 4

How should an emerging-market central bank decompose inflation into supply and demand components?

Accepted Answer

Apply sign-restriction identification at the sectoral level following Shapiro (2024), then aggregate. Colunga-Ramos, Chen, and Perales (2026) operationalize this with rolling bivariate VARs (42 months, 12 lags) on log prices and log quantities for each of 31 Mexican CPI sectors, classifying monthly shocks: same-sign residuals = demand-driven; opposite-sign = supply-driven. Aggregate sectoral contributions using CPI weights into five economically meaningful groups (food, energy, services, manufacturing, housing). Construct an importance score as |correlation with aggregate inflation| x average contribution. Validate with a structural VAR using the Benigno et al. (2022) Global Supply Chain Pressure Index for supply shocks. The rankings are robust across window lengths of 36-60 months, lag choices of 6-18, and Bayesian estimation with Normal-Wishart priors.

Question 5

What SVAR ordering correctly identifies monetary policy shocks in an emerging market like Mexico?

Accepted Answer

Order external variables first (GSCPI, oil, U.S. CPI and IP, U.S. Divisia M2), then domestic inflation components, domestic real activity, domestic Divisia M2, and exchange rate — with a block-recursive impact matrix preventing contemporaneous feedback from domestic to external variables. Colunga-Ramos, Chen, and Perales (2026) use this structure following Kim and Roubini (2000) and Cushman and Zha (1997). Two implementation points matter more than ordering: use Divisia monetary aggregates — Colunga-Ramos and Valcarcel (2024) produce Mexico's first Divisia M4 and show it avoids the price puzzle without commodity-price controls — and include COVID-19 dummies for months with IGAE growth beyond three standard deviations.

Question 6

What historical episodes in Mexico validate the supply-demand inflation decomposition?

Accepted Answer

Three episodes show the decomposition provided policy-relevant guidance aggregate inflation missed. (1) May 2020: headline inflation at 2.56% looked neutral, but Colunga-Ramos, Chen, and Perales (2026) show 93.4% of it was supply-driven (2.39% vs 0.17% demand), validating Banco de Mexico's rate cuts from 7.00% to 4.25%. (2) September 2008 - March 2010 Global Financial Crisis: the demand component fell from 3.12% to 1.84% while supply fell less, meaning the decline was cyclical. (3) June-July 2024: headline inflation at 4.70% in June masked a demand component at 2.53% (above its 2.06% long-run average); next month headline jumped to 5.22% with demand at 3.32%, and Banco de Mexico correctly held at 11.00%.

Category	CPI weight (MX)	Demand importance (MX)	Supply importance (MX)	Role in the U.S. benchmark	Mexican pattern
Food	Large	0.591 (rank 1)	0.533 (rank 1)	Primarily a supply-driven category in Shapiro (2024) .	Dominates both channels — the food-dominance pattern. Creates inflation swings only partially controllable through interest rates.
Energy	Medium	0.311 (rank 2)	0.267 (rank 2)	Primarily supply-driven in advanced economies.	Symmetric: Mexico produces oil for global markets and consumes it domestically, so energy amplifies both cyclical demand and supply pressures.
Services	Medium-large	0.257 (rank 3)	0.098 (rank 4)	Dominates demand-driven inflation in Shapiro (2024) .	Large average contribution (0.555 pp) but low correlation (0.463) — the services floor. Slow-moving; explains persistent disinflation resistance since 2023.
Manufacturing	Medium	0.209 (rank 4)	0.100 (rank 3)	Procyclical in most economies.	High demand-side correlation (0.691) but modest magnitude. Global value chain integration absorbs supply disruptions.
Housing	18.05%	0.054 (rank 5)	0.018 (rank 5)	Largest component of core CPI in the U.S.; strong monetary-policy response channel.	Housing non-response. Prices barely move; correlation with supply-driven inflation is even slightly negative (-0.082).

Emerging Markets | Robin Chen

Decomposing supply and demand driven inflation in Mexico: Evidence from sectoral analysis

Why Mexican Inflation Behaves Differently: Food Dominates, Services Persist, Housing Barely Moves

Key Concepts

Where Mexican Inflation Differs from the United States

Q1. Why is food so dominant in Mexican inflation compared to advanced economies?

Q2. What explains Mexico’s slow disinflation since 2023 despite 725 basis points of tightening?

Q3. Why does housing contribute so little to Mexican inflation despite being 18% of the CPI basket?

Q4. How should an emerging-market central bank decompose inflation into supply and demand components?

Q5. What SVAR ordering correctly identifies monetary policy shocks in an emerging market like Mexico?

Q6. What historical episodes in Mexico validate the supply-demand inflation decomposition?

Data and Code

Citation