Itaú BBA - COLOMBIA – Inflation surprised to the upside in September

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COLOMBIA – Inflation surprised to the upside in September

October 6, 2020

Despite the widespread acceleration at the margin, inflation remained low in September.


After numerous months of downside surprises, consumer prices gained 0.32% from August to September (0.23% last year), surprising both the Bloomberg market consensus (+0.12%) and our 0.18% call to the upside. The bulk of the surprise to us came from housing, apparel, and transportation prices as subsidies and tax relief measures continue to unwind. Annual inflation accelerated for the first time since the beginning of the pandemic, rising to 1.97% from 1.88% in August, near the lower bound around the central bank’s 3% target. With the economy fully reopening in September, inflation surprising to the upside, and signs that inflationary pressures could be normalizing (our seasonally adjustment shows a widespread acceleration at the margin), we believe the central bank will likely keep the policy rate unchanged at this month’s meeting as it evaluates the economic response to the monetary and fiscal stimuli.

With COVID-19 relief measures being rolled back, consumer price pressures increased. Housing expenses (+0.51%; contributing 17bps), communication fees (+2.55%; 11bp), and transportation prices (+0.83%; 11bp) were the key divisions driving price gains in the month. The price of goods and services in those divisions picked up as subsidies (to electricity and water) and tax reliefs (reduced VAT for mobile plans) continued to unwind. Countering price gains was education (-2.77% MoM; subtracting 12bps) as tuition fees for universities and technical colleges continued to fall to compensate reduced demand, and also due to food and non-alcoholic beverages (-0.04% MoM; -1bp). Core inflation (excluding food and energy prices) came in at 0.33% from August, above the 0.16% variation one year ago.
The acceleration of annual inflation, albeit to a still low level, is closely linked to supply factors, rather than recovering domestic demand. Inflation ticked up 9bps to 1.97%, as the energy drag moderated (2.5% fall vs. 3.1% drop in August) amid the consolidation of the global oil price recovery. Nevertheless, even after excluding food and energy prices, core inflation increased to 1.92%, from 1.75% in the previous month. Driving price pressures were durable goods, which include an important tradable component, gaining 2.88% YoY (2.55% in August). Non-durable goods inflation accelerated to 1.97%, from 1.79% previously, while service inflation was broadly steady at 2.20%. At the margin, inflation accelerated to 3.6% in the third quarter of the year (SA, annualized), from +0.7% as of August and -1.8% in 2Q20.

Inflation will likely remain close to the lower bound of the 2%-4% range around the target until the end of the year. While the unwinding of COVID-19 relief measures (such as utility subsidies) and the reopening of the economy would diminish downside pressures on inflation, the wide output gap and broadly stable food component ought to limit price increases going forward.

Miguel Ricaurte
Carolina Monzón


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