Itaú BBA - COLOMBIA – Milder-than-expected disinflation in July

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COLOMBIA – Milder-than-expected disinflation in July

August 6, 2020

The unwinding of government measures and reopening of the economy would contain downside pressures.

After numerous months of downside inflation surprises, consumer prices were flat from June to July, surprising both the Bloomberg market consensus (-0.15%) and our -0.32% call to the upside. The bulk of the surprise to us came from housing, restaurants and transportation prices. Nevertheless, the flat number was far milder than the 0.22% gain in July last year, meaning annual inflation dropped further, to 1.97% from 2.19% in June, sitting below the lower bound around the central bank’s target for the first time since December 2013. The coronavirus shock has led to a rapid loosening of the labor market that would keep inflationary pressures contained, and hence provide space for the central bank to ease monetary policy further. Yet, we note that recent communication from the board suggests that future movements would be more data-dependent. As subsidies to public services and reduced VAT on communication are set to unwind (estimated at around 40-50bps, with part already occurring in July), it is possible the board will evaluate such implications on inflation and inflation expectations, besides external financial conditions, and opt to pause the rate cut cycle in the next policy meeting.
 
The key inflation driver in the month was housing expenses (+0.16% MoM; contributing 5bp), as some subsidies to utilities (water, electricity, gas) expired (explaining around 2/3 of the surprise to us). Additionally, restaurants and hotel prices increased 0.27% MoM (3bp contribution) and transportation prices rose 0.25% MoM (3bps). Meanwhile, the food division was the main drag in the month (-0.80%; subtracting 13bps), amid normalized supply. Core inflation (excluding food and energy prices) was 0.17% (up from the 0.11% last year), while the measure just excluding food prices came in at 0.16% (0.14% last year).
 
Moderating food inflation and declining energy prices are dragging annual inflation down, while core inflation was broadly stable at a low level. The slowdown in annual inflation to 1.97% was led by the 3.28% drop in energy prices (+2.76% in June), the sharpest historical decline, while food prices slowed to 5.00% (6.55% previously). Non-durable goods inflation moderated to 1.79% from 2.49% in June, pulled down by food prices. Meanwhile, inflation excluding food and energy remained low, at 1.82% yoy (6bps up from a historical low in June), as durable goods inflation ticked up to 1.98% from 1.72% previously. At the margin, we estimate that inflation accumulated (and annualized) in the quarter was -1.0%, moderating from the 2.0% drop in 2Q20 (+2.9% in 1Q20). Core inflation dropped 0.1% (accumulated and annualized; -2.2% in 2Q20 and +2.2% in 1Q20).
 


The latest data hints that inflation is unlikely to venture too far below  the 2% floor of the range around the central bank’s target. The unwinding of government measures and reopening of the economy would contain further downside pressures. Nevertheless, the wide output gap and a stable currency curb upside pressure on prices. We see inflation ending the year at 2.0% from 3.8% in 2019.

 

Miguel Ricaurte
Carolina Monzón



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