Itaú BBA - COLOMBIA – Downside inflation surprise in October

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COLOMBIA – Downside inflation surprise in October

November 6, 2020

Muted inflationary pressures and a gradual activity recovery support a prolonged period of rates on-hold

Consumer prices retreated 0.06% from September (+0.16% one year earlier), coming in well below the Bloomberg market expectations (+0.15%) and our 0.21% forecast. The bulk of the surprise to us came from education and housing prices. As a result, annual inflation retreated to 1.75% from 1.97% in September, remaining below the lower bound of the range around the central bank’s 3% target. Muted inflationary pressures alongside a gradual activity recovery support our call for a prolonged period of rates on-hold, with risks tilted towards more stimulus. 
Education, food, and housing prices were key drags in the month. The education division prices dropped 2.48% MoM (subtracting 11bps from the headline print) as tuition fees for universities and technical colleges continued to fall to compensate for lower demand. Additionally, food and non-alcoholic beverage prices fell 0.32% mom (-5bp contribution), amid increased supply. Meanwhile, countering price reductions were transportation and recreation services (+0.90% and +0.23% MoM, respectively) favored by the reopening of the economy.  
Core consumer prices remain low, reflecting weak internal demand. Annual inflation fell to 1.75%, from 1.97% in September, dragged by the energy price contraction of 3.61% (-2.49% in September), due to electricity price falls in some regions of the country. Nevertheless, even after excluding food and energy prices, inflation also moderated to 1.85%, from 1.92% in September, reflecting contained domestic demand pressures. Within this group, durable goods, which includes an important tradable component, remained a key driver of inflation, gaining a broadly stable 2.88% yoy. Meanwhile, service inflation dipped 7bps to 2.13%. At the margin, we estimate that inflation accumulated (and annualized) in the quarter was 2.9%, compared to 3.6% in 3Q20 (-1.8% in 2Q20) dragged by energy prices along with moderating health price pressures. On the same basis, core inflation posted 3.5%, versus the 4.5% rise in 3Q20 (-2% in 2Q20).

We see inflation ending the year near the lower bound of the central bank’s 2% – 4% range around the target. The unwinding of government measures to deal with the Covid crisis, a weak currency and reopening of the economy would likely contain the downside pressures stemming from the large output gap, preventing inflation from falling significantly further.

Miguel Ricaurte
Carolina Monzón

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