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Since early March, the US-Iran conflict has disrupted Gulf oil supply, closing the Strait of Hormuz to commercial traffic and taking Brent crude from roughly USD 70 in January to above USD 100 in April. A ceasefire returned prices to pre-war levels in June before a second escalation in July pushed Brent back towards USD 97, a rise of nearly 40% on the month. For Latin America’s oil importers this amounts to a substantial imported inflation shock. Chilean inflation has climbed from a five-year low of 2.4% in February to 4.3% in June, its highest since September 2025, while Brazilian inflation stood at 4.64% in June with energy and fuel inflation running at 7.71%.

Mexico has moved in the opposite direction, with headline inflation falling to 3.37% YoY in June from 3.94% in May despite having entered the shock with the highest rate of the three economies, peaking at 4.59% in March. Mexico has largely absorbed the oil shock through weekly adjustments to fuel subsidies and administered price agreements, while underlying core inflation has remained broadly stable.

A Common Shock, Three Outcomes

Central banks and statistical agencies in Chile and Brazil have linked the recent rise in inflation to the energy and production-cost effects of the Middle East conflict. Banco Central de Chile notes that inflation excluding food and energy remains close to its 3% target, while Brazil’s statistical agency, IBGE, attributes higher energy and fuel inflation to the closure of the Strait of Hormuz. Differences in monetary policy do not fully explain Mexico’s divergence from these peers. Banco de México held its policy rate at 7% in February, cut it to 6.75%, and ended its easing cycle in May. Despite this less restrictive stance relative to Brazil, Mexican headline inflation has continued to fall while inflation in Chile and Brazil has risen.

Where the Recent Disinflation Sits

The composition of Mexico’s June inflation print shows that the divergence is concentrated in non-core components. Core inflation stood at 4.03%YoY, compared with just 1.11% for non-core inflation. While core inflation has eased only gradually from 4.52% in January, non-core inflation has fallen sharply from 5.08% in April to close to 1% in June. Fruit and vegetable prices declined 8.99%MoM as crop conditions normalised and government agreements with producers took effect. At the same time, energy prices and government-authorised tariffs rose by only 0.08% despite the oil shock, following a 1.67% decline in May driven by seasonal electricity tariff reductions. Mexico’s headline disinflation has therefore not come from a broad easing in underlying price pressures. It has been driven mainly by volatile and administered components, particularly food, energy and regulated tariffs.

A Weekly Excise Subsidy

The main instrument absorbing the shock is the fiscal stimulus applied to the Special Tax on Production and Services, or IEPS, on motor fuels. Under this mechanism, the Secretaría de Hacienda y Crédito Público publishes a weekly agreement in the Diario Oficial de la Federación specifying the share of the fixed per-liter excise tax absorbed by the federal government. The measure functions as a contingent shock-absorption tool rather than a permanent subsidy. It was withdrawn on April 12, 2025, and remained at zero for 48 consecutive weeks through nearly a year of normal price fluctuations. It was reinstated on March 13, 2026, within days of the closure of the Strait of Hormuz, and has since been adjusted weekly in response to movements in international crude prices. Because the comparison period contained no subsidy, each YoY reading from March onward compares subsidized fuel prices with an unsubsidized base. The resulting downward wedge in fuel inflation will therefore persist for as long as the stimulus remains in place.

Sizing the Wedge

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