Itaú BBA - Itaú Inflationary Surprise Index - Downside inflation surprises are moderating

Macro Vision

< Back

Itaú Inflationary Surprise Index - Downside inflation surprises are moderating

May 4, 2017

Brazil kept the index in the negative range, as the widespread disinflationary trend extends itself.

Our Itaú Inflationary Surprise Index increased to -0.09 in April, coming from -0.16 in March. The narrative is similar to last month’s in that Mexico led the acceleration, while Brazil kept the index in the negative range, as the widespread disinflationary trend extends itself. This is a natural outcome, in what has been a sharper contraction in economic activity in Brazil vis-à-vis its Latin American peers.

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 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 a presented as a three-month moving average in order to avoid excess volatility.

Brazil’s index inched down to -0.46 from -0.44 in March. The highlights were a sharp downside surprise from April’s inflation preview (IPCA-15), coming in at 0.21% when the median of estimates were at 0.27%, and a negative IGP-M reading, registering -1.1%, below consensus’ -1.0% forecast. Year-over-year, consumer inflation as measured by the IPCA-15 is now at 4.4%, below the central bank’s target of 4.5%. As activity fails to pick up in a meaningful way, the output gap consequently remains largely negative, supporting continuity of the disinflationary trend going forward.

Mexico’s index leaped to 0.57 in April from 0.36 in March. Like last month, all three indexes surprised to the upside, as inflation continues to be driven by the lagged effects of exchange rate depreciation (even though the currency has been strengthening since late January). The CPI posted a 0.61% month-over-month gain in March – above market expectations at 0.58% – largely explained by tradable prices (core goods), which increased 0.78%. With the recent strengthening of the Mexican peso, however, there are lower upside risks for inflation this year (our forecast is at 5.0%).

Chile’s index increased to 0.15 in April from -0.14 in March. Consumer price inflation in March came in slightly below market expectations - prices increased 0.4% from February to March, below the 0.5% forecasted by the market. Annual inflation was stable at 2.7%, completing six months below the 3% target. We expect inflation to stay low for the remainder of the year (2.8% yearend).

Colombia’s index declined to -0.14 in April from 0.16 in March. March inflation came in at 0.47%, slightly lower than the 0.51% forecasted by the market. The disinflation process advanced in March, with consumer price inflation dropping below 5% for the first time since August 2015 – owing much to lower food price increases as well as a still high comparison base. As activity remains weak and the exchange rate remains  more stable than in previous months, we see inflation continuing to decelerate throughout the year, reaching 4.1% by yearend.

Peru’s index shot up to 0.71 from -0.11 in March. The CPI increased 1.3% month-over-month in March, well above market expectations (0.80%), its highest monthly rise in 19 years – influenced by the “coastal El Niño”. Destructive flooding and landslides destroyed crops and disrupted transport, causing a significant increase of food prices. Inflation retreated in April (to be covered in the next report), as food supply shock begins to revert. We expect inflation to decrease to 3% by the end of 2017.

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%)


 

Lourenço Paiva


 


 



< Back