Itaú BBA - COLOMBIA – Unsurprising inflation in May

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COLOMBIA – Unsurprising inflation in May

June 6, 2018

With low inflationary pressures, we expect one more rate cut to 4.0% before the cycle ends.

Inflation in May came broadly in line with expectations and remains just above the 3% target in annual terms. The 0.25% monthly price gain (0.23% one year before) was in line with the 0.25% Bloomberg market consensus and just below our 0.30% forecast. Annual inflation inched up, but remains broadly unchanged since March, pointing at limited inflationary pressures. As inflation remains under control and growth below potential, the door to further easing remains ajar.

The monthly change was led by increases in housing and transport costs. The 0.45% monthly increase in housing related prices led the gain in the month (+0.14 pp contribution) after prices of utilities (electricity, gas and water) and rent accelerated in May. Additionally, transportation rose 0.38% led by airplane tickets (+3.39%) and gasoline prices (1.07%), contributing 0.05pp to the total reading. Meanwhile, the monthly food inflation (0.06%) was stable compared to one year before (0.07%). Prices excluding food gained 0.33% (+0.29% one year earlier), while tradable goods (excluding food and regulated prices) grew below headline inflation (0.22%, still up from the 0.15% recorded one year before). The non-tradable goods (also excluding food and regulated items) gain was broadly unchanged at 0.32% (0.34% in May 2017).

Annual inflation inched up to 3.16% (from 3.13% in April). Tradable inflation increased mildly to 1.58% (from 1.51% in April), while non-tradable inflation (4.57%) stood broadly unchanged from last month, both measures excluding food and regulated prices. Meanwhile, regulated prices accelerated to 5.79%, from 5.65% previously. Inflation excluding food prices, came in at 3.85% (3.76% in April) as regulated prices (particularly electricity and water services) picked up. Our diffusion index indicates that price pressures have become less widespread.

At the margin, food and supply factors raised inflation. The three-month accumulated inflation was 3.0% (seasonally adjusted and annualized) versus 1.4% recorded in 1Q18 as regulated inflation picked up to 7.4% (from 6.7%), tradable inflation, excluding food and regulated prices, increased to 0.6% (from -0.2% in 1Q18), and food picked up to 1.7% from -2.9%. However, non-tradable inflation (also excluding food and regulated prices) moderated to 3.7% from 4.4% in 1Q18, likely reflecting a weak domestic demand and more favorable inertia.

We expect inflation to end the year close to the 3.2% (4.09% in 2017). With low inflationary pressures and activity that remains weak, we still expect one more rate cut before the cycle ends with the policy rate at 4.0% this year.


Miguel Ricaurte
Carolina Monzón 

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