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

Author

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  • Colunga-Ramos, Luis Fernando
  • Chen, Zhengyang
  • Perales Torres, José Angel

Abstract

We decompose Mexico’s inflation into supply- and demand-driven components across 31 CPI sectors from 2006 to 2024. To identify which sectors create inflation swings versus steady pressure, we construct an importance score combining correlation with aggregate inflation and average contribution size. Food ranks highest for both inflation types. This differs from developed economies where services dominate demand inflation. Mexican services contribute 24% of demand-driven inflation on average but fluctuate little, acting as a persistent floor that explains slow disinflation since 2023. Housing plays almost no role despite representing 18% of the CPI basket because prices there barely move. Structural VAR analysis validates these patterns: demand inflation responds to domestic monetary expansions while supply inflation reacts to global supply chain disruptions.

Suggested Citation

  • Colunga-Ramos, Luis Fernando & Chen, Zhengyang & Perales Torres, José Angel, 2026. "Decomposing supply and demand driven inflation in Mexico: Evidence from sectoral analysis," Economics Letters, Elsevier, vol. 264(C).
    • Handle: RePEc:eee:ecolet:v:264:y:2026:i:c:s0165176526001746
    DOI: 10.1016/j.econlet.2026.112980
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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