Itaú BBA - Itaú Inflationary Surprise Index - More modest downside surprises

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Itaú Inflationary Surprise Index - More modest downside surprises

March 2, 2017

Leaving out Peru, the Latin American countries covered are seeing more modest downside surprises, or even positive ones.

Our Itaú Inflationary Surprise Index reached -0.23 in February. Leaving out Peru, the Latin American countries covered are seeing more modest downside surprises, or even positive ones. Nonetheless, the general inflationary trend is still skewed to the downside, as activity in the region struggles to pick up substantially from low levels and exchange rates in South America are stronger. Worthy of continuous monitoring and unlike its peers, Mexico carries a deteriorating outlook for inflation.

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 was at -0.46 in February, slightly higher than -0.58 in January. The overall trend is still skewed to downside surprises, though results were more mixed in February, with the IPCA-15 coming in (slightly) above expectations for the first time in seven months, rising 0.54% vs. consensus’ 0.50% estimate. Nonetheless, the headline IPCA-15 reading fell to 5.0% (from 5.9%) with services inflation surprising to the downside, a continuous signal that inflation is undergoing a more structural slowdown (with a favorable food-price also helping). January’s IPCA contributed to the negative number, registering a 0.38% increase in January, below the 0.42% expected by the market. In all, we expect the headline IPCA reading at 4.4% y/y by yearend.

Chile’s index jumped to 0.07 in February,from -0.57 in January, but the general inflationary trend remains downhill. Prices increased 0.5% in January, above the 0.2% forecasted by the market. The higher-than-expected reading came mostly from one-off increases (intercity transportation, alcoholic beverages, natural gas prices), but key measures of core inflation (such as non-tradable and prices excluding energy and food) fell substantially from the previous month. Similarly, in spite of the increase in annual inflation to 2.8% from 2.7%, annual core inflation has fallen for eleven consecutive months and is at its lowest since January 2014. In this fashion, we see constrained inflationary pressures going forward, with inflation within the lower half of the central bank’s 2%-4% target throughout 2017.

Colombia’s index accelerated to 0.42 in February from -0.06 in January. Prices gained 1.02% in January, above the 0.91% expected by market analysts, but nonetheless decelerating to 5.47% from 5.75% (in annual terms) in the previous month, owing to a significant deceleration of food prices. Inflation is gradually falling, but the effect of the tax reform on prices, which has yet to fully materialize, will likely curb this disinflation process. Even so, we see inflation retreating to 4.3% by yearend, aided by the unwinding of the El Niño and a weak domestic demand.

Mexico’s index jumped to 0.02 in February from -0.09 in January. The bi-weekly CPI figure between the second half of January and the first half of February came broadly in line with expectations. The increase is mostly attributed to tradable goods’ prices, which are more sensitive to peso depreciation. As a result, inflation reached 4.71%, further above the Central Bank’s 3-percent target. Looking ahead, we expect inflation to increase in 2017 (relatively to 2016), driven by the lagged effects of peso depreciation, but it will moderate next year, as temporary shocks dissipate and domestic demand slows down.

Peru’s index continued to fall, reaching -0.11 from 0.42 in January. The CPI posted a 0.24% month-over-month increase in January, slightly below market expectations (0.30%). Inflation was driven by higher food prices associated with adverse weather conditions, and an increase in gasoline prices. The sol’s appreciation, however, has been curbing several exchange-rate sensitive prices. Looking ahead, we believe inflation will edge down with little demand-side pressure and a fairly stable exchange rate, although food prices, which are crucial because of their large weight on the index (38%) will still be threatened by climate.

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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