Itaú BBA - COLOMBIA – Inflation falls further in November

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COLOMBIA – Inflation falls further in November

December 7, 2020

Inflation for 2020 will likely come in closer to 1.5%, rather than our current 2% call.

Prices fell 0.15% from October to November (+0.10% one year before), coming in well below the median of market expectations (+0.06%) and our +0.05% forecast. The bulk of the surprise to us came from the apparel division and education expenses. Annual inflation moderated by 26bp to 1.49%, remaining far below the central bank’s 3.0% target, while core inflation also ticked down to a record low of 1.49%. With inflationary pressures contained, and the activity recovery still consolidating, there is room for the central bank to retain the significant monetary impulse for a sustained period.

Education and apparel prices pulled monthly inflation down. The main drag in the month was the 3.71% fall of the apparel division (subtracting 14bp from the headline print) likely due to the VAT-free day on November 21, along with additional offers (Black Friday, etc.). Additionally, the education division fell 1.03% mom (-4bp contribution), as tuition fees for universities and technical colleges continued to fall in response to lower demand. Meanwhile, countering price reductions in the month were housing expenses (0.11% mom, 4bp contribution) amid unwinding subsidies to utilities, while the restaurants and hotel division gained 0.28% mom (+3 bp) as the economic reopening boosts demand.

Contained core inflation reflects weak internal demand. The drop of annual inflation to 1.49% yoy (1.75% in October) was pulled by declining electricity prices. Overall, energy prices contracted 4.49% (-3.61% in October). Nevertheless, core inflation (excluding food and energy prices) also moderated to 1.49% yoy, from 1.85% previously (3.6% average during 2010-19). Contained core inflationary pressures come amid durable goods, a key reflection of tradable inflation, slumping to 1.96% (from 2.88% in October). Meanwhile, services ticked down 16bp to 1.97%. At the margin we estimate that inflation accumulated in the quarter was 2.2% (annualized), compared to 3.6% in 3Q20 (-1.8% in 2Q20), amid a widespread slowdown.

The recent downside inflation surprises mean that inflation for 2020 would likely come in closer to 1.5%, rather than our current 2% call.
Domestic demand recovery, and the undoing of subsidies and other support measures would favor the convergence to the 3% target next year.

Miguel Ricaurte
Carolina Monzón

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