Itaú BBA - Itaú Inflationary Surprise Index - Inflation surprises to the downside in Latin America

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Itaú Inflationary Surprise Index - Inflation surprises to the downside in Latin America

May 4, 2018

The main downward contributions in the month came from the price dynamics in Brazil, Mexico and Colombia.

Our Itaú Inflationary Surprise Index fell to -0.31 in April, from -0.04 in March. The main downward contributions in the month came from the price dynamics in Brazil, Mexico and Colombia. The decline in the Brazilian component in the month reflected downward surprises in the official consumer price indexes (IPCA). In Mexico, the variation of the price indexes released in April continued to surprise downwards, evidence of more favorable inflationary dynamics. As a result, we continue to forecast disinflation to 3.7% by year-end. The Colombian component returned to negative territory, with a stronger currency and an output gap in negative territory curbing inflationary pressures of non-tradable items. Finally, the surprise indexes of Chile and Peru remained stable in the month, but still in negative territory.

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 surprise index declined to -0.35 in April, from -0.11 in March. Inflation data released in the month stood below market expectations, with a highlight to the IPCA for March and the IPCA-15 for April. The IPCA index rose 0.09% in March, accumulating a 0.70% increase in the first quarter, the lowest result of the historical series for the period. Likewise, the IPCA-15 increased 0.21% in April, with the 12-month rate remaining stable at 2.80%. Its core measures increased month-over-month. In the average of the three most used core measures (smoothed trimmed means, double weight core and core inflation by exclusion), the variation reached 0.24%, compared to 0.20% in March, with the 12-month rate remaining unchanged at 3.2%. Overal, the evolution of inflation remains favorable, with several measures of underlying inflation at low levels, including the components most sensitive to monetary policy (service prices).

Mexico's surprise index fell to -0.29 in April, from 0.11 in the previous month. CPI inflation posted a 0.32% change in March, below the median of expectations (0.40%, according to Bloomberg). Annual inflation declined to 5.04% in March year-over-year (from 5.34% in February), and core inflation fell to 4.02% (from 4.27%) in the same period. Core goods (tradable) inflation came in well below the previous reading (4.64%, vs. 5.18% previously), while services (non-tradable) inflation remained unchanged at 3.49%. Likewise, bi-weekly inflation surprised downward in the first half of April (-0.35% vs. -0.27%), while the month’s deflation was influenced by the seasonality of regulated electricity prices, which contributed with a drop of 0.33pp in the full index. As a result, accumulated in 12 months, inflation fell to 4.69% (from 4.90% in the second half of March), while core inflation fell to 3.70% (from 3.90%). In sum, we expect inflation to recede to 3.7% by the end of 2018, with the more benign evolution of the Mexican peso as the main driver of this decline.

Chile's surprise index posted a slight decline to -0.10 in April, from -0.07 in the previous month. The 1.8% inflation in March (2.0% in February) was characterized by a further dip in tradable inflation, to 0.9% from 1.3% one month earlier, while non-tradable inflation was broadly stable, at 2.9% (a low level). Core inflation (excluding food and energy prices) was also stable, at 1.6%, and below the lower bound of the target range. We expect inflation to remain below the 3.0% target for the year, ending 2018 at 2.5%. A gradual acceleration to 2.8% by the end of 2019 is expected, given that the output gap is narrowing.

Within the countries that we monitor, Colombia's surprise index showed the strongest decline in the month, to -0.38 (0.06 previously). This was due to an inflation reading well below expectations in March, at 0.24% (compared to a market expectation of 0.38%, as per Bloomberg). As a result, annual inflation approached the central bank's 3% target, moderating to 3.14%, from 3.37% in February. Food inflation remained low at 0.98% (0.94% in February), while inflation excluding food prices fell to 4.05% (4.40% one month ago). The pass-through of the strengthened Colombian peso to domestic prices is evidenced by the low tradable goods inflation (from 2.50% in February to 1.80%); however, the more persistent non-tradable inflation is also falling (reaching 4.76%, from 4.95% in February).

Peru's surprise index remained virtually flat at the level of -0.19 (-0.21 in March). At the margin, the consumer price index rose 0.49%, in line with market expectations (0.50%). We see inflation at 2.2% by the end of 2018. In this sense, the acceleration of activity will also help remove the downward pressure of core prices.

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%)



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