Itaú BBA - Itaú Inflationary Surprise Index - Downside surprises all across LatAm

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Itaú Inflationary Surprise Index - Downside surprises all across LatAm

August 2, 2017

Brazil’s index dropped again, amid another batch of downside inflation surprises.

Our Itaú Inflationary Surprise Index dropped to -0.36 in July, coming from -0.18 in June. Brazil’s component accounts for a great deal of the movement, amid another batch of downside inflation surprises in the country. In Chile, the CPI for the month of June posted a deeper monthly deflation than expected even by the most optimistic forecast. Finally, the Mexican index fell at the margin for the first time this year, adding to tentative signs that inflation is stabilizing.

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 fell deeper into negative territory in July (to -0.64, from -0.57 in June), after another batch of downside surprises. July’s mid-month inflation (IPCA-15) registered a -0.18% monthly variation, below the market’s expectation of -0.10%. The June headline IPCA printed at -0.23% month-over-month, also below the median of analysts’ forecasts (-0.19%). Similarly, private indexes surprised to the downside: the IGP-M July fell 0.72% month-over-month, close to the most optimistic forecast (median: -0.63%) and registering the fourth deflationary monthly reading in a row. Our IPCA projection for this year is at 3.3%.

Mexico’s index retraced to 0.42 in July from 0.67 in June, amid the first CPI downside surprise since January. June inflation posted a 0.25% monthly variation in June, slightly below median market expectations (0.27%, as per Bloomberg). Inflation came in above expectations in the first half of July (0.24% vs. 0.19%), but year-over-year inflation seems to be stabilizing. In all, we expect inflation to reach 5.4% by the end of this year. With the appreciation of the MXN, we expect tradable inflation to fall fast in 2H17.

Chile’s index plunged to -0.61 in July, coming from -0.17 in June, as annual inflation edged below the lower bound around the 3% target. Inflation in June printed at only 1.7% year-over-year, well below the median of expectations (2.1%). The continued decline in tradable inflation, favored by a stable CLP, remains the main drag on CPI. However, non-tradable inflation also fell in June, standing at its lowest level since July 2013. The data has led us to revise our yearend inflation forecast to 2.4%, from 2.8% previously.

Colombia’s index fell back to -0.17 in July, after strolling near zero in the previous month (-0.08). Monthly inflation in June (0.11%) was below the Bloomberg market consensus of 0.20%. Accordingly, the annual figure (3.99% vs. 4.37% in May) re-entered the 2-4% tolerance range around the target for the first time since January 2015. However, underlying inflation measures remain sticky, and the annual improvement was largely a product of base effects; as the latter become unfavorable, CPI will likely register a year-over-year acceleration in August.

Peru’s index plummeted to -1.31 in July (-0.38 in June), testing 6-year lows. Monthly inflation came in negative for the third month in a row. The CPI fell 0.16% month-over-month in June, less than the -0.10% figure expected by the market. Looking ahead, annual headline inflation will continue moving down as the agricultural supply shock finishes reverting and the weaker economy translates into less demand pressure on prices. Lower oil prices will also be relevant to bring down inflation in the short-term. We expect inflation to decelerate to 2.5% 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%)


 

Luka Barbosa
Eduardo Marza


 

 



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