Itaú BBA - COLOMBIA – Smaller than expected inflation rebound in September

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COLOMBIA – Smaller than expected inflation rebound in September

October 6, 2017

Food prices remain a drag to inflation.

Consumer price inflation surprised to the downside in September. The monthly price gain of 0.04% in September (-0.05% one year before) was below the +0.17% Bloomberg market consensus and our +0.18% forecast. The low print was explained by a retreat in food prices (-0.40%). Annual inflation inched up from 3.87% in August to 3.97%, remaining in the central bank’s 2%-4% target range for the fourth consecutive month. Headline inflation, excluding food prices, came in at 4.71% from 4.81% in August. The latest inflation prints reaffirm the fading of supply shocks to food and tradable goods prices. However, with inflation still close to the upper bound of the central bank’s 2%-4% target range, the board will likely act cautiously and leave the policy rate unchanged at 5.25% in coming months.

The main drag in September was the 0.4% monthly drop in food prices (-0.91% one year ago), subtracting 0.12pp from the headline figure. Entertainment prices also decreased 0.32% (-0.79% one year ago). Meanwhile housing prices (+0.34%) and education (+0.30%) led price gains in the month, together contributing 0.13pp to the headline reading. These groups contain goods that are more susceptible to indexation, and are thus could be affected by past inflation readings. The core measure excluding food gained 0.22% from August (0.32% one year ago), while regulated prices (excluding food items) increased 0.42% (0.40% in September 2016) led by utilities, reaffirming the inertia in this component. Meanwhile, non-tradable inflation is still sticky (+0.19% versus +0.20% 12 months earlier).

Food prices accelerated to 2.2% year over year amid a lower base of comparison (+0.20% in the previous month), leading to the headline figure rebound. Excluding food prices, inflation decreased to 4.71% from 4.81% in August (5.92% one year ago). Meanwhile, tradable goods prices (also excluding food and regulated prices) decreased to 3.41% from 3.75% in the last month, likely benefitted from the performance of the exchange rate. On the other hand, regulated prices continue to accelerate and reached 5.68% from 5.57% in August, while non-tradable inflation (excluding food and regulated prices) was stable for the sixth consecutive month at 5.2%. At the margin, dynamics remain favorable, with accumulated inflation in 3Q17 coming in at 3.3% (seasonally adjusted and annualized) from 3.7% during 2Q17.

We forecast yearend inflation of 4.2%, but acknowledge downside risks amid a more favorable behavior of inflation in recent months. We see a stable policy rate for the remainder of this year. However, with inflation expected to resume its trajectory towards the 3% target early next year, we expect rate cuts taking the policy rating to neutral levels in 2018 (as explicitly indicated by general manager Juan Jose Echavarría). We acknowledge the risk that a faster disinflation process could lead to the frontloading of the easing cycle.


Miguel Ricaurte

Carolina Monzón


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