Red-hot inflation (4.42%), steel peso: What's happening in the Mexican economy?

Mexico faces inflation of 4.42% in May, its fourth monthly increase and above Banxico's target. Surprisingly, the peso breaks a record against the dollar. Find out why it matters to you.

The Mexican economy presents a complex and seemingly contradictory outlook on June 9, 2025. While annual headline inflation soared for the fourth consecutive month to 4.42% in May, once again exceeding the Bank of Mexico's target, the Mexican peso is showing notable strength, reaching new year-to-date lows against the US dollar.

The National Institute of Statistics and Geography (INEGI) reported that the National Consumer Price Index (INPC) registered a monthly change of 0.28% in May, bringing the annual rate to 4.42%. This figure is above the upper limit of the Bank of Mexico's (Banxico) target range of 3%, with a margin of +/- 1 percentage point, marking a worrying trend for Mexicans' purchasing power.

The breakdown of inflation components reveals a broad-based increase. Core inflation, considered a better indicator of medium-term price trends by excluding the most volatile elements, also registered an increase, reaching 4.06% annually, compared to 3.93% in April. Within this category, prices for goods rose 3.67% and those for services 4.49%.

Non-core inflation, meanwhile, accelerated more sharply, reaching 5.34% annually, a considerable jump from 3.76% the previous month. This performance was largely driven by rising agricultural product prices, which increased by 6.76% annually.

Contrary to what might be expected in a scenario of rising inflation, the Mexican peso has demonstrated surprising resilience. On June 9, the exchange rate was trading at levels close to $19.05–$19.08 pesos per dollar, marking new lows so far this year and a significant appreciation.

This strength is primarily attributed to external factors, such as the widespread weakness of the US dollar globally, influenced in part by the Trump administration's tariff policies. The "growth of the Mexican economy" is also cited as a factor supporting the local currency, although Gross Domestic Product (GDP) growth expectations for 2025 are modest: the OECD forecasts 0.4%, while the CitiBanamex survey puts it at 0.10%. Analysts consulted by Citi even predict an even stronger close to 2025 for the peso.

This divergence between rising domestic inflation and a robust peso suggests that capital flows, possibly attracted by the nearshoring phenomenon (although not explicitly detailed in recent reports) and Banxico's relatively high interest rates (despite the 50 basis point cut in May), could be playing a preponderant role in the exchange rate quotation, above short-term inflationary fundamentals.

The economic outlook is complemented by other data that call for caution. Formal job creation in Mexico registered a 58.8% drop during the first five months of 2025 compared to the same period last year. Given this scenario and to avoid a possible downgrade of the country's credit rating, the government has announced it will implement public spending cuts.

In the financial markets, the Mexican Stock Exchange (BMV) began the week with a slight decline of 0.27% in its main indicator, the S&P/BMV IPC.

The combination of persistent inflation, weakening formal job creation, and the need for public spending cuts creates a challenging economic environment for the average citizen. Although the peso's strength may offer certain benefits, such as cheaper imports and a respite for dollar-denominated borrowers, its impact on household finances could be limited if rising prices are not controlled and the labor market does not improve. The Bank of Mexico faces a complex dilemma in its upcoming monetary policy decisions.