Itaú BBA - Itaú Inflationary Surprise Index - Positive, at last

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Itaú Inflationary Surprise Index - Positive, at last

February 2, 2018

The index registered the first positive figure since July 2016.

Our Itaú Inflationary Surprise Index rose to 0.08 in January, coming from -0.16 in December. The result marks the first positive figure since July 2016. The broad index rise is mostly due to Brazilian and Colombian components. In the first case, the last inflation print of 2017 came in above the ceiling of market expectations. Yet, inflation last year fell short of the lower bound of the tolerance range around the target. In contrast, inflation in Colombia ended the year above the 4% upper bound around the target for the third consecutive year. At the margin, inflation surprised to the upside, pressured by entertainment and transportation. We see disinflation to 3.4% by yearend in Colombia, with risks tilted to the downside.
 


 

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 increased to -0.05 in January, coming from -0.10 in December, owing to the surprisingly high IPCA clip for December 2017. In fact, December’s IPCA came in at 0.44%, above the highest of market expectations (median: 0.30%). Consequently, the index ended the year up by 2.95%, slightly below the lower bound of the inflation tolerance range (3.0%) and marking the lowest annual reading since 1998. So, headline inflation was 3.34 p.p. lower than the 6.29% increase registered in 2016. Prices for food consumed at home advanced 0.42% in December, but posted 4.9% deflation in 2017 (+9.4% in 2016). Conversely, the mid-month inflation consumer price index IPCA-15 printed at 0.39% in January, a touch below the median of market forecasts (0.43%). Housing provided a negative contribution in the month (-0.06 p.p.), due to lower electricity bills after the green mode was activated in the flag tariff system. The IGP-M index also surprised to the downside (0.76% vs 0.81%). All-in, we still estimate the IPCA for the full year at 3.8%.

Mexico’s index rose to 0.50 in January, coming from -0.04 in December, owing to the moving-average effect. At the margin, inflation releases registered mixed surprises. The CPI posted a 0.59% month-over-month variation in December, slightly above median market expectations (0.58%). The spike liquefied petroleum gas prices coupled with increases for a few non-core food items exerted significant upward pressure on the index. Moreover, the minimum wage hike entered into force in December, in contrast with the customary practice of implementing it on the first day of each year. In contrast, the bi-weekly CPI inflation posted 0.24% in the first half of January, surprising median market expectations (0.38%) to the downside. Annual inflation decreased to 5.51% year-over-year in the first half of January (from 6.85% in the second half of December), mostly driven by a favorable base effect associated to energy prices (the so-called “gasolinazo”). In addition, both core goods and core services came in lower, at 5.94% (from 6.11%) and 3.50% (from 3.74%) respectively. Looking ahead, we expect inflation to decrease to 3.7% by the end of this year. The more benign evolution of the MXN will be the key driver, as the backlog of exchange rate depreciation has run its course.

Chile’s index increased to 0.26 in January (-0.32 in the previous month), on the back of the moving average dynamics. Consumer prices gained 0.15% from November to December, broadly in line with the Bloomberg market consensus (0.2%). Annual inflation ticked up to 2.3% in the month (1.9% in November), aided by a low base of comparison. Non-tradable inflation continues to moderate and is now at the 3.0% target, while for the third consecutive month, tradable inflation is less of a drag at 1.9%. Looking ahead, the recent strengthening of the CLP and an only gradual recovery of activity mean inflation will likely remain subdued most of the year. We see inflation hovering below 2% for most of 1H18 and ending the year close to 2.5%.

Colombia’s index increased to 0.14 in January, from -0.28 in the previous month. In December, prices gained 0.38% from the previous month, above the Bloomberg market consensus expectation (0.28%). Inflation ended 2017 at 4.09% (5.75% for 2016) – the third consecutive calendar year in which inflation was above the 4% upper bound around the target. In the breakdown, tradable goods prices (excluding food and regulated items) remains within the 2-4% tolerance range at 3.79%, while regulated prices and non-tradable prices (excluding food and regulated prices) ended the year above 5%. Amid a negative output gap, less inertia and the strong performance of the COP, we forecast inflation will decelerate to 3.4% by yearend.

Peru’s index increased to -1.15 in January, coming from -1.23 in December, owing to the moving average base effect. At the margin, the CPI posted a modest monthly variation of 0.16% in December, undershooting its 10-year median variation by 10bps. The result was somewhat below median market expectations (0.18%, as per Bloomberg). Annual headline inflation ended 2017 at 1.36% (from 1.54% in November), while core inflation fell to 2.15% year-over-year (from 2.23%). The breakdown shows more signs of deflationary pressures at the core. Going forward, we expect annual headline inflation to continue decreasing during the 1Q18, and then firm up to 2.2% by the end of 2018.

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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