Itaú BBA - Itaú Inflationary Surprise Index - Brazilian inflation resumes downside surprises

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Itaú Inflationary Surprise Index - Brazilian inflation resumes downside surprises

December 4, 2017

Downside surprises in Brazil, which had been moderating in the last months, staged a comeback in November.

Our Itaú Inflationary Surprise Index dropped to -0.28 in November, coming from -0.15 in October. Downside surprises in Brazil, which had been moderating in the last months, staged a comeback in November. Both the IPCA for October and, particularly, the IPCA-15 for November printed below median market forecasts. Elsewhere, Colombian inflation registered another downside surprise, whereas Chile’s CPI surprised to the upside, partly normalizing the abnormally low September print. In Mexico, CPI for the first week of November came substantially above the ceiling of market expectations. Nonetheless, we still believe inflation has entered a downward trend.

The inflation surprise index compares trends in inflation indicators released during the month to what analysts had been expecting for them. The inflation index is a GDP-weighted average of separate indices for Brazil, Mexico, Chile, Colombia and Peru. The inflation index, however, possesses fewer indicators for each country (vis-à-vis our proprietary Activity Surprise Indexes) due to the limited number of inflation indices that are consistently forecasted by agents. As usual, an above-zero reading means inflation overshot estimates. A below-zero reading means inflation came in lower than expected. The index is presented as a three-month moving average in order to avoid excess volatility.

Brazil’s index decreased to -0.25 in November (-0.06 in September), after rising for four consecutive months. This time, official CPIs missed expectations, whereas private indexes printed higher than expected. The IPCA increased 0.42% in October, below the median of market expectations (0.49%). Year-to-date, the IPCA climbed 2.21%, down significantly from 5.78% in the year-earlier period. Meanwhile, the annual reading accelerated to 2.70% from 2.54% in September. The housing group provided the largest upward contribution, led by electricity (0.12 pp) and bottled cooking gas (0.06 pp). The electricity reading reflected the activation of the red mode (level 2) in the tariff flag system in the beginning of October after the indication of a yellow mode in the previous month. Tariff adjustmen ts by so me utility companies were also behind the move. By the same token, the mid-month consumer price index (IPCA-15) climbed 0.32% in November, matching the most optimistic forecast (median: 0.38%). Importantly, the underlying indicator for service inflation (which excludes tourism items, household services, courses and communication) advanced 0.04% in November, with the annual change slowing to 3.6% from 4.1%. In sum, inflation remains at low levels and with good composition. Looking forward, IPCA inflation is expected to increase slightly, but to remain at comfortable levels, especially due to substantial slack in the economy.

Mexico’s index decreased to -0.26 in November (-0.19 in October), owing to the moving average dynamics. At the margin, inflation data surprised to the upside. Monthly inflation for the month of October printed a tad above expectations (0.63% vs. 0.60%), as did the bi-weekly variation for the second half of October (0.19% vs. 0.13%). Importantly, the CPI for the first half of November registered a bi-weekly inflation of 0.92% - well above the most pessimistic forecast in the Bloomberg survey (median: 0.75%). The main sources of pressure include energy prices (electricity, gasoline and liquefied petroleum gas), FX-sensitive services (air tickets and tourism) and non-core food prices. Given the upward inflation surprise, we revised our inflation forecast for 2017 to 6.2%, from 5.9%. Neverth eless, w e still believe inflation has entered a downward trend, and the lagged effects of exchange rate appreciation will be the leading driver of disinflation.

Chile’s index increased to -0.46 in November (-0.75 in the previous month). The monthly inflation for the month of October surprised to the upside, partly normalizing the low September print. Like in September, October’s surprise (0.6% print vs. 0.3% expected) is once again explained by a handful of volatile goods (14 items) including tourism packages (0.1pp of the surprise) and some food products. Taken together, the net surprise over the two months was -0.1pp. Going forward, inflation is set to remain below the central bank’s 3% target until early-2019. The lagged effect of the prolonged strong performance of the CLP and inertia will help keep inflation low.

Colombia’s index rose to -0.34 in November (-0.49 in the previous month), due to the moving average dynamics. Once again, inflation surprised to the downside in October, as prices gained 0.02% in the month - below the Bloomberg market consensus of +0.10%. On the back of unfavorable base effects, the 12-month headline inflation picked up to 4.05% - the first print above the central bank’s 4.0% upper bound since May this year. In the breakdown, we note non-tradable inflation remains sticky and core measures are still above the target range. All in all, we now expect yearend inflation of 3.9% (4.2% previously). Our revision partly responds to the two downside surprises registered in September and October, which have totaled 0.22pp.

Peru’s index plunged back to negative territory (-0.47) in November, coming from +0.34 in October. In fact, the CPI recorded monthly deflation in the month of October (-0.47% vs. -0.01% expected), owing to falling food prices amid the ongoing normalization of agricultural output after the El Niño shock in 1H17. Food prices (38% of the CPI basket) fell 1.19%, subtracting 45bps from the headline print. In our view, inflation will continue decreasing in the next months. Given the evidence of a stronger than expected disinflationary process, we have revised our end-of-year inflation forecast for 2017 to 1.5%, from 1.8%. Overall, we are observing a disinflation process driven by the reversion of the agricultural supply shock of El Niño and – to lesser extent – by the benign evolution of the exc hange rate and subdued domestic demand.

 

Methodology Note

Our Itaú Inflationary Surprise Index compares trends in inflation indicators to what analysts had been expecting for them each month. The index considers the month that each indicator is released. For instance, February’s inflation reading released in March will be incorporated to March’s surprise index.

The index is a GDP-weighted average of separate indeces for Brazil, Mexico, Chile, Colombia and Peru. An above-zero reading means inflation overshot estimates. Below zero means inflation came in below expectations. The index is a three-month average in order to avoid excess volatility.

We build the inflation surprise index for each country using inflation indicators for which consensus estimates are normally provided in the Bloomberg survey. The weight of each indicator in the index depends on its importance for the economy. For example, headline consumer inflation numbers enjoy a higher weight than regional inflation indicators or wholesale price indices.

We use the deviation of the actual print from the consensus estimate (surprise), subtract the result from the historical average deviation and then divide the result by the standard deviation of the surprise. This methodology provides a better sense of how important was the surprise in each month.

The weight of each country in the aggregate inflation index depends on the size of its GDP. Brazil has the highest weight, followed by Mexico.

It’s worth noting that, due to revisions in the economic indicators and as lagged announcements, the surprise indices may be revised.

Indicators on which the index is built:

Brazil: IPCA (Headline CPI) (30%), IPCA-15 (30%), IGP-10 (10%), IGP-M (10%), IGP-DI (10%), IPC-S (5%), IPC-FIPE (5%)

Mexico: Headline CPI (50%), Bi-Weekly CPI (50%)

Chile: Headline CPI (100%)

Colombia: Headline CPI (100%)

Peru: Headline CPI (100%)

 


Luka Barbosa
Eduardo Marza



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