Itaú BBA - COLOMBIA – Lower-than-expected inflation in August

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COLOMBIA – Lower-than-expected inflation in August

September 8, 2020

A wide output gap and relatively stable currency ought to limit price increases going forward

Consumer prices were roughly stable from July to August amid limited domestic demand pressures. Consumer prices retreated 0.01% from July, below our +0.2% forecast, the 0.11% Bloomberg market consensus, and the +0.09% recorded last year. The bulk of the surprise to us came from education expenses and food prices. Annual inflation moderated by 0.09bps to 1.88%, remaining far below the central bank’s 3.0% target, while core inflation also ticked down to an on-record low of 1.75%. Low inflation justifies stable rates in the short-run, with the central bank inspired to act if there is evidence of diminishing inflationary pressures.
 
Education, food, and apparel prices pulled down the monthly inflation. The main drag in the month was the 3.48% fall of education fees, subtracting 16bps from the headline print, as tuition fees for universities and technical colleges were reduced to compensate for a lower demand. Additionally, food prices fell 0.45% (subtracting 7bps) due to significant drops in rice and potato prices. The apparel division also contained inflationary pressures, shrinking 1.0% (subtracting 4bps), likely reflecting weakened domestic demand. Countering price falls was communications (3.60% MoM gain; +14bps) as the transitory VAT reduction on mobile internet services, expectedly started to unwind.
 
Core inflation remains below 2%, while gains at the margin are mild. In annual terms, inflation moderated to 1.88% from 1.97% in July, and now sits at the lowest level since November 2013. A 3.12% energy price drop remains a key inflationary drag, while food price pressures are moderating (to 4.67% YoY, from 5.00% in July; 8.2% cycle peak in April). Yet even after excluding the volatile energy and food prices, core inflation decelerated to 1.75% (1.82% in July; 3.4% in 2019), as the domestic demand slump led to lower service inflation (2.19% vs. 2.32% in July; 3.75% in 2019). Nevertheless, despite significant job losses and heightened uncertainty, durable consumption goods posted a price rise of 2.55% YoY (from 1.98% in July), the highest since early 2017, possibly a result of pass-through from previous COP depreciation. At the margin, inflation over the last three months (SA, annualized) accelerated to 0.6% from a 2.0% drop in 2Q20, boosted by communications, health, and alcoholic beverage prices, hinting that inflation is unlikely to venture too far below 2% going forward.

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Inflation would 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 bill subsidies) and the reopening of the economy would diminish downside pressures on inflation, the wide output gap and relatively stable currency ought to limit price increases going forward. We expect inflation to end the year at 2.0% (from 3.8% in 2019).

Miguel Ricaurte
Carolina Monzón



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