Itaú BBA - COLOMBIA – Inflation accelerates in August, but dynamics still favorable

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COLOMBIA – Inflation accelerates in August, but dynamics still favorable

September 6, 2017

Favorable dynamics mean further easing in coming months is possible

As expected, inflation picked up in August from the previous month. The 0.14% monthly price gain (-0.32% one year before) came in between our +0.21% forecast and the +0.12% market consensus. Annual inflation accelerated to 3.87%, after reaching a multi-month minimum of 3.40% in July, but remained below the 3.99% recorded in June. Headline inflation, excluding food prices, came in at 4.81% (4.79% in July) as regulated prices (particularly, gas and water) picked up. While headline inflation close to the upper bound of the 2%-4% target range would motivate the central bank to leave the policy rate unchanged at 5.25% at this month’s meeting, favorable dynamics mean that the door to further easing in coming months is not completely closed.

The monthly change was led by increases in the housing component. The retreat in food prices (-0.08% month-over-month), apparel (-0.05%), and communications (-0.02%) together subtracted 0.02 pp from the monthly gain. Meanwhile, the 0.44% month-over-month increase in housing related prices led the gain in the month (+0.14 pp contribution) after prices of utilities and rent accelerated in August. The core measure excluding food was broadly stable at +0.23% from +0.21% one year ago, while regulated prices (excluding food items) continue to make gains (0.68% in the month, versus +0.16% in August last year) as inflation inertia prevails. Tradable inflation (excluding food and regulated prices) remains low (-0.8% month-over-month, +0.25% one year prior) likely favored by sales and promotions in the retail sector and the lagged effect of a stronger currency in 1H17. Finally, non-tradable inflation continues to reflect inertia in price gains (+0.24% versus +0.22% 12 months before).

In annual terms, food price inflation rebounded to 1.69% as it encountered a lower base of comparison (+0.20% in the previous month), but remains the main drag to prices. Excluding food prices, inflation remains above the upper bound of the 2%-4% range around the target, at 4.81%. Non-tradable inflation (excluding food and regulated prices) remained stable from last month at 5.23%, while tradable goods prices (also excluding food and regulated prices) moderated to 3.75% (from 4.09% in July) favored by a strong currency. The 5.57% increase in regulates prices was led by the 7.74% gain in piped gas prices, while water price inflation accelerated to 9.38% (from 5.60% previously and 5.52% in August 2016). As a result, the non-tradable component and prices of regulated goods jointly explain close to 2/3 of total inflation, reflecting indexation mechanisms prevail. At the margin, dynamics remains favorable, with inflation accumulated over three months in August stable from the end of 2Q16 for the headline figure (at 3.6% seasonally adjusted and annualized) and the non-tradable component (at 4.5%), while tradable prices have fallen more convincingly (to 1.4% from 2.6%).

As inflation continues to accelerate towards yearend, we see the central bank staying on hold for the remainder of the year. We expect inflation to end the year at 4.2%, but below the 5.8% recorded in 2016. A widening output gap and an only-moderate exchange rate depreciation expected for next year will likely bring inflation down to 3.8% by the end of 2018. Our base case scenario sees further rate cuts next year, taking the policy rate to neutral levels near 4.5%, but favorable dynamics this year could mean the easing cycle is frontloaded.


 

Miguel Ricaurte

Angela González


 


 



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