Itaú BBA - Inflation surprises to the upside in Argentina

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Inflation surprises to the upside in Argentina

April 17, 2019

The political cycle and uncertainty about the outcome of the presidential elections is a obstacle to disinflation.

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Headline inflation exceeded expectations in March, driven by food, seasonal products and regulated prices. Consumer prices rose 4.7% mom from February, above the 4.05% market consensus forecast. The annualized measurement of the last three months rose to 56.4% (from 44% in February), while the annual reading marked a new record high (54.8%, the highest figure in 27 years). Core item prices also climbed higher. Core inflation came in at 4.6% mom (up from 3.9% in February), led by food and beverages. At the margin, the core reading is running at an annualized 57% (last three months), up from 45.9% in February. The last twelve-month inflation reading jumped to 55.6%, from the previous 52.5%. Additionally, concerns regarding the generalized use of indexation in the ongoing wage bargaining season (and consequently, risks of higher inflationary inertia) further deteriorate the inflation outlook. The price tracking consulting firm Elypsis currently estimates a 4.0% mom increase in consumer prices for this month, due to the announced price hikes in gas tariffs, public transportation, gasoline and housekeeper wages.

The political cycle and uncertainty about the outcome of the presidential elections is another obstacle to disinflation. Today, the administration will likely announce an agreement with producers and retail shops to freeze the prices of 40 basic products for 180 days. While the measure, in our view, will not have a material impact on the CPI, it signals the government’s concern in maintaining support for the October election. The central bank, for its part, has tightened its monetary policy stance, which in turn led to an increase in the Leliq rate to over 65%. Furthermore, it announced, after the release of March’s CPI, a freezing of the limits of the non-intervention zone until the end of this year (in the USDARS 39.75 – 51.45 range), meaning that the bar for foreign exchange sales by the central bank is now lower (the non-intervention zone was being adjusted daily at a monthly 1.5% pace). At the same time, the monetary authority said it will not buy dollars if the peso trades stronger than the lower bound (turning the lower limit of the band symbolic). So, authorities are taking another measure aimed at keeping the exchange rate stable in the short-term (the central bank is also auctioning daily dollars lent by the IMF to the treasury). We recently revised our forecasts for inflation this year to 40%, from 35% in our previous scenario. We also expect higher interest rates by December, at 45%, up from 37%.
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Yearend headline inflation expectations increased slightly, following the supply-side pressures registered in March, but remain well behaved, posing no risk to our stable rate outlook. According to the central bank’s analysts monthly survey, inflation expectations for 2019 increased to 3.28% (from 3.23% previously; Itaú: 3.0%), but the 1-year horizon inflation outlook ticked down to 3.27% (3.30% previously). The 2-year horizon inflation expectations moved to 3.16%, from 3.20%. Expectations for core inflation measures (which exclude food prices) came in at 3.06% for the 1-year horizon (3.20% previously), and remained at the 3% target for the 2-year horizon. On the monetary policy front, analysts still foresee just one rate increase this year, but postponed, for the second month in a row, the timing of the hike by one month (to October). A second hike, to 4.75%, is now seen in March 2020 (rather than February in the previous survey). Meanwhile, the growth outlook for this year ticked up to 3.2% (from 3.1%). A further recovery to 3.4% is expected for 2020. We also see the activity recovery consolidating ahead (3.3% this year and 3.6% for 2020), but weak global economic growth is a key risk. Meanwhile, with low inflation and a more accommodative stance from global central banks, we believe the Central Bank will remain on hold in 2019, at 4.25%. The next monetary policy meeting will take place on Friday, April 26.

Day Ahead: March’s consumer confidence will be published. The still slow activity recovery amid a loose labor market may partly explain why confidence remains low and poses a risk to the activity recovery.

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