Reassessing different gauges of inflation Headline inflation ended 2021 at 7.35%, the highest calendar year inflation since 2000. However, the 12m reading broke a four-month streak of large increases, stabilizing relative to the Nov print. Moreover, base effects from agricultural and energy prices should lead to an improvement in headline inflation over the next two quarters. Core inflation, by contrast, continued its upward climb in Dec, ending 2021 at 5.9%, also a 20-year high. Core is showing few signs of letting up, having risen by over 200bps in the past year and by over 100bps in the last three months alone. Beyond the inflation reports we publish on a biweekly basis, on a quarterly basis we like to update a number of analytic tools in order to better characterize the inflation shock Mexico is experiencing. Based on this, how certain can we be that inflation has indeed peaked?
Histograms of inflation distributions show persistence of supply shocks Let’s start by looking at histograms of monthly and quarterly inflation distributions for some of the key inflation categories, particularly within core inflation. What we are focused on here is how inflation is distributed relative to its historical median for all components of a given category in a given month or quarter. The distribution of processed food prices in Q4’21 continues to be skewed towards higher than median historical readings. However, relative to previous quarters, the density function has become flatter, suggesting that there is greater dispersion of price increases, albeit with a clear skew towards ones that are larger than the historical median. Judging from FAO international food prices, which impact Mexican processed food prices with a long lag, these price pressures are likely to persist in coming months. Turning to non-food merchandise goods prices, perhaps the category most affected by external supply bottlenecks, we see that the histogram for Q4’21 is among the most skewed to the right that we have seen since the beginning of the pandemic, suggesting that there is no sign of relief on this front. If we look at this same distribution on a monthly basis, we see that the Dec histogram is among the most heavily skewed to the right in the past year. This could be explained by large price reversals following the Buen Fin offers in Nov. But the distribution of price changes in Nov was very much in line with the historical norm, implying that the large Dec increases go beyond price adjustments after the Buen Fin. Lastly, the histograms for service prices show a very different pattern than those of merchandise goods. In Q4’21 the distribution of price increases was in line with their historical median. However, please note that this chart is truncated. If we look at the untruncated version, we see that the right-side tail of the distribution is very long, which means that a few services are seeing price increases that are much higher than the historical mean. Put differently, the fact that inflation on services ex-housing and education ended the year at 6.3% reflects large price pressures on a small number of items, such as air travel, tourist packages and luncheonettes, rather than generalized pressures on wider services.
Does revenue growth trump profitability? No, but revenue growth is more urgent. Investors want growth now, as long as profitability comes at some point. Our “Evaluating tech companies” series begins focusing on revenue growth because we think it is a leading indicator for the success of a tech-oriented business model. In most cases, revenue growth will generate profitability at some point in the future (unless the company is an inefficient capital allocator, but this is another topic). In addition, consistent revenue growth usually means the company is well-managed, has a solid product and a sizeable addressable market. Of course, there are other ways to achieve increased profitability levels. Alternatives to revenue growth include lowering opex or capital allocation strategies. We will discuss such factors in the following series, because they are important as well. But consistent stock outperformance in the tech world will rely mostly on consistent revenue growth..
