Itaú BBA - COLOMBIA – Upside inflation surprise to end 2020, but core inflationary pressures limited

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COLOMBIA – Upside inflation surprise to end 2020, but core inflationary pressures limited

January 6, 2021

Renewed mobility restrictions and significant COP appreciation will keep inflationary pressures contained at the start of 2021.

After numerous months of downside surprises, consumer prices gained 0.38% from November to December (0.26% last year), surprising both the Bloomberg market consensus (+0.19%) and us to the upside (0.26%). The bulk of the surprise to us came from housing, apparel, and food prices as subsidies and tax relief measures continue to unwind, and seasonal food demand boosted consumer prices. Renewed mobility restrictions in parts of the country during late December and January, along with a gradual recovery of salaried jobs and significant COP appreciation point to inflationary pressures remaining contained at the start of 2021.

The unwinding of subsidies and food prices are pressuring inflation, while core dynamics reaffirm that the significant output gap is containing consumer price gains. The main contributors to the monthly price rise in December were the 0.52% increase in the housing division (contributing 17bps, boosted by energy prices as subsidies expired), the apparel division picking up by 2.95% (contributing 10bps as prices normalized following the VAT-free initiative in November), and the 0.43% rise in the food and non-alcoholic beverages (contributing 7bps to the headline gain) boosted by seasonal holiday demand. Meanwhile, the main drag was the 2.11% drop of the education division (subtracting 9bps from the headline print), the fifth consecutive fall of this category in response to reduced demand. Consumer prices (excluding food and energy) increased 0.25%, 11bps below the gain one year before.

Annual core inflation (excluding food prices) in 2020 was 1.03%, the lowest this century. Meanwhile, the upside surprise led to annual headline inflation inching up from 1.49% in November to 1.61%, ending 2020 below the central bank’s lower bound of the range around the 3% target for the first time in 7 years (3.80% in 2019). The energy price drag moderated to a 3.07% fall in December, compared to a 4.49% drop in November, amid the global oil price recovery. Also lifting prices was the food and non-alcoholic beverage division accelerating to 4.80% (from 4.09% previously). On the contrary, inflation excluding food and energy prices moderated to 1.38% from 1.49% in November (3.40% in 2019) as service inflation retreated to 1.60% (from 1.97%). Durable goods inflation, which includes an important tradable component, rose to 2.50% (1.96% in November). At the margin, inflation over the last three months (SA, annualized) inched down to 1.7% from a 3.6% in 3Q20, dragged by apparel, communications and entertainment.


As the activity recovery consolidates during the year and subsidies expire, inflation is expected to gradually converge towards the 3% target. However, the solid performance of the currency combined with new mobility restrictions is a downside risk to our forecast, increasing the odds of additional interest rate cuts.

Miguel Ricaurte
Carolina Monzón

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