Itaú BBA - PERU – Inflation continued undershooting expectations in February

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PERU – Inflation continued undershooting expectations in February

March 1, 2018

Negative output gap and normalization of food prices continue exerting downward pressure

Peru’s CPI inflation came in below median market expectations for a six consecutive month, amid a negative output gap and a normalization process of food prices (after last year’s El Niño) that has not ran its course yet. The CPI posted 0.25% month-over-month in February, undershooting our forecast (0.35%) and median market expectations (0.28%, as per Bloomberg). The result was lower than the 10-year median variation for February by 7bps. The inflationary pressure was driven by higher energy prices – mainly gasoline (up by 2.3%) and regulated electricity (up by 3.2%) – and the seasonality of education services (up by 0.35%) given the beginning of the school year in March (when the seasonal increase will be sharper). Conversely, food prices advanced at a modest 0.1% month-over-month, dragged by the price decline of fruits (-3.34%) which are largely harvested along the Peruvian coast (where agricultural supply continues recovering from the havoc caused by El Niño). Additionally, we note that core prices (excluding food and energy) also increased at a soft pace, 0.14% month-over-month, 3 bps below the 10-year median variation. 

Annual headline inflation moved further below the Central Bank’s 2 percent target, while the core measure (ex food & energy) stood unchanged. Headline inflation decreased to 1.18% year-over-year in February (from 1.25% in January), getting closer to the lower bound of the 1pp tolerance range around the 2% target. Meanwhile, core inflation remained constant at 1.97% year-over-year. Notably, annual food inflation (-0.53% year-over-year, from 0.22% in January) fell to negative terrain for the first time in almost eleven years. Moreover, the diffusion index shows that inflation is pretty low across a broad range of goods and services. In fact, the indicator that tracks the percentage of items with annual inflation above the 2% target posted 34% in February (slightly above the level observed in January, 32.1%, but almost half of the 60.4% print recorded one year before).   

At the margin, nevertheless, inflation firmed up somewhat; although it still stands at subdued levels, especially for core. The seasonally-adjusted 3-month annualized variation of the CPI increased to 1.67% (from nil in January). Likewise, the same measure of the core index posted 1.34% (from 1.17% in January).

We expect annual headline inflation to fall to 0.4% in March – because of a base effect associated to El Niño (which caused food prices to spike in the same month of last year) – and then firm up to 2.2% by the end of 2018. This base effect is quite big because food prices account for almost 40% of the CPI and El Niño caused them to spike by 2.1% month-over-month in March 2017. Nevertheless, we expect annual inflation to increase gradually during the rest of the year when base effects will play in the opposite direction. Moreover, the pick-up of activity should also help to remove downward pressure from core prices. 

Alexander Müller

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