Itaú BBA - COLOMBIA - Falling inflation, in spite of tax hikes

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COLOMBIA - Falling inflation, in spite of tax hikes

March 6, 2017

We expect the disinflationary process to advance amid a firmer currency and weak demand.

Consumer price inflation continued to decelerate in February, in spite of tax increases, as food price gains moderate. Prices increased 1.01% from January, down from 1.28% one year before, below market expectations (1.15%) and Itaú’s 1.30% forecast. Most major categories posted gains in the month, with education (+6.78% MoM, 0.42 percentage point contribution to the headline gain) and food prices (+0.71 MoM, +0.21pp) leading the monthly increase. The gain in food prices came well below the 1.44% recorded one year prior, as past supply-side shocks fade. However, non-tradable (excluding food and regulated items) prices accelerated to 1.66% (+1.44% one year prior) as did tradables (also ex-food and regulated, 1.11% from 0.75%), likely reflecting the implementation of the VAT increase in February.

Annual inflation continues to edge towards the central bank’s 2%-4% target range. The 5.18% inflation recorded in February (5.47% in January) was the lowest since August 2015 (4.74%). Food price inflation was still the main contributor to 12-month inflation at 5.21% YoY (+1.55pp contribution), but continues to fall (5.97% in January) from the cycle high of 15.71% in July last year. Housing related costs (+4.55% YoY, +1.39pp contribution), was the next main contributor to inflation in the month. Excluding food prices, inflation decelerated to 5.17% from 5.26% the previous month. Meanwhile non-tradable (5.06%) and tradable inflation (5.75%), both excluding food and regulated prices, picked up from January (4.83% and 5.37%, respectively). Our diffusion index continues to moderate but only gradually, showing that inflation remains sticky.

Going forward, we expect the disinflationary process to advance amid a firmer currency and weak demand. Still, we see inflation at 4.3% this year, above the upper bound of the target.


 

Miguel Ricaurte

Vittorio Peretti

 



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