Itaú BBA - Itaú Inflationary Surprise Index - Mostly downside inflation surprises

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Itaú Inflationary Surprise Index - Mostly downside inflation surprises

April 4, 2017

Leaving out Mexico, inflation data reinforce the ongoing disinflationary context.

Our Itaú Inflationary Surprise Index reached -0.16 in March, coming from -0.22 in February. The driver behind this modest acceleration was Mexico, where all inflation indicators released came in above expectations. Nevertheless, inflation data from the remaining South American countries asserted the ongoing disinflationary context, as activity in the region points to a slow and unsteady recovery.

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 -0.44 in March, relatively steady from -0.46 in February. The backdrop of more widespread disinflation is still present: February’s headline consumer inflation (IPCA) came in 10 bps below market expectations (rising 0.33%). In March, IPCA-15 inflation preview was 0.15%, in line with expectations. According to IBGE, this was the lowest March figure since 2009. The 12-month rate therefore fell to 4.73%, after hitting 5.02% in February. The breakdown of inflation also remains benign, with various components retreating, including service prices.

Mexico’s index jumped to 0.36 in March from 0.02 in February. All three indexes surprised to the upside, as inflation continues to be pressured by the lagged effects of exchange rate depreciation. The CPI posted a 0.58% month-over-month variation in February – above market expectations at 0.54% – largely explained by tradable prices (core goods). Inflation also came in high in the first half of March, posting a 0.35% bi-weekly variation – above market expectations at 0.33%. Looking forward, we expect inflation to peak around 3Q17 (at 5.4%) and then decrease to 5% by the end of 2017, driven by the weakening of domestic demand and the stabilization of the peso.

Chile’s index fell to -0.14 in March ,from 0.08 in February. In February, consumer price inflation came broadly in line with expectations (increasing 0.24%), remaining below the 3% target. The resulting annual inflation inched down to 2.7%, from 2.8% in the previous month. Overall, we see constrained inflationary pressures going forward, as our diffusion index continues to show roughly the same amount of goods posting inflation above the 3% target than below it.

Colombia’s index decelerated to 0.16 in March from 0.43 in February. Consumer price inflation continued to decelerate in February, in spite of tax increases, as food price gains moderate. Prices increased 1.01% from January, down from 1.28% one year before, below market expectations (1.15%). Annual inflation continues to edge towards the central bank’s 2%-4% target range. Going forward, we expect the disinflationary process to advance amid a firmer currency and weak demand. Still, we see inflation at 4.3% this year, above the target’s upper bound.

Peru’s index inched up to -0.10 from -0.12 in January, despite the month’s downside inflation surprise. The CPI posted a 0.24% month-over-month increase in January, below market expectations (0.30%). The sol’s appreciation 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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