Itaú BBA - Itaú Inflationary Surprise Index - Downward inflation surprises sustained

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Itaú Inflationary Surprise Index - Downward inflation surprises sustained

February 2, 2017

Following the recent trend, inflationary pressures continue to recede in Brazil, Colombia and Chile.

Our Itaú Inflationary Surprise Index reached -0.37 in January. Persistent negative inflation surprises translate into the observed stability of the index in significantly negative terrain. Following the recent trend, inflationary pressures continue to recede in Brazil, Colombia and Chile. Lastly, Mexico’s inflationary surprises have veered moderately to the downside, though out of its peers, the country bears the worst inflation outlook going ahead.

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’sindex was at -0.58 in January, nearby December’s -0.60, maintaining downward momentum. Inflation continued below market expectations, extending its downward trend and revealing a more widespread deceleration of its components. The IPCA registered a 0.30% increase in December, below the 0.34% expected by the market, sealing 2016 at 6.29% (inside the central bank’s target upper bound). IPCA-15 January inflation followed this same trend, slowing to 5.94%. The composition of inflation is becoming more favorable, with deceleration in prices more sensitive to economic activity (services and industrial goods), a reflection of a more structural decline in inflation. In all, we expect this trend to extend itself throughout 2017, with inflation ending the year at 4.7%.

Chile’s index increased to -0.57,from -0.71 in December, though still in far into the negative end. Consumer price inflation saw its third downside surprise in the last four months, falling 0.2% in December (mkt: +0.1%). Tradable goods have led the disinflation process in recent months, and have also brought the diffusion index to lower levels. Annual inflation came in at 2.7%, from 2.9% in the previous month, and down from 4.4% in 2015. We expect inflation to remain in the lower half of the central bank’s 2%-4% target throughout 2017.

Colombia’s index came in at -0.05 in January, increasing from -0.55 in December. Consumer prices were up 0.42% in December, above market expectations (0.3%). This was a result of an upward surprise in food prices, yet food price inflation is nonetheless diminishing following the end of the El Niño phenomenon, and annual inflation continued to slow. The disinflationary process will likely continue this year as the impacts from previous supply shocks (exchange depreciation and El Niño) fade.

Mexico’s index reached into the negative range, at -0.06 in January from 0.15 in November, but the decline was due to previous months’ effect on the moving average. The bi-weekly CPI figure between the second half of December and the first half of January significantly exceeded market expectations, coming in at 1.51% (mkt: 1.25%). The increase is mostly attributed to gasoline price increases. As a result, inflation reached 4.78%, above the upper bound of the Central Bank’s target range for the first time since December 2014, influenced by

in the second half of December. The other two inflation figures that compose Mexico’s index surprised to the downside (though not significantly), but looking ahead, the outlook for inflation has deteriorated substantially aa a weaker exchange rate, increasing inflation expectations, and various hikes in taxes and other prices in the economy.

Peru’s index fell to 0.42 from 0.50 in December. The index still finds itself in the high positives due to a large upward inflation surprise in November. CPI inflation posted 0.33% (in line with expectations), slowing down in December, although drought conditions and higher international oil prices prevented a more significant decline. Our diffusion index lowered from 68% in November to 64% in December, suggesting that inflation is becoming less generalized across goods and services.Peru’s inflation further slowed down in January (to be discussed in the next report). We expect CPI inflation at 2.7% in 2017, with food inflation moderating over the course of the year.

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%)


 

Laura Pitta
Lourenço Paiva


 



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