Itaú BBA - COLOMBIA – Core inflation stable at 3% target in June

Macro Latam

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COLOMBIA – Core inflation stable at 3% target in June

julio 8, 2019

As supply shocks fade, inflation is likely to retreat towards the central bank’s 3% target

Headline inflation picked up in June, partly due to transitory supply shocks. In June, prices gained 0.27% from May (0.15% one year before), coming in between the market consensus (0.22%) and our 0.32% forecast. Food prices and transportation led price gains in the month, partly pressured by the impacts of the closure of a key road linking the east of the country to the capital. As a result, annual inflation picked-up to 3.43% from 3.31% in May. Overall, we expect inflation to remain near the central bank’s 3% target as supply shocks unwind and a widening output gap limits demand-side pressures. In this context, we see room for lower rates in Colombia, with one 25bps cut (to 4%) to be implemented by yearend.

Accelerating food prices is the key factor behind rising inflation. The 0.85% rise in food and non-alcoholic beverage prices contributed 0.13pp to the headline CPI gain (0.27% MoM) as the rainy season and the Villavicencio road closure heighten pressures. Additionally, the transportation division increased 0.45% mom (contributing 0.06pp), as travel disruptions and the vacation period lifted inflation. Meanwhile, education and telecommunications contained price gains in the month. Core inflation (excluding food and energy prices) rose 0.25% from May, in line with the variation one year ago.

Despite the headline inflation pick up (to 3.43%), measures reflecting demand pressures are either stable at low levels or falling. Inflation excluding food and energy prices remained stable at the 3% target, while service inflation edged down to 3.38% (from 3.43%). Meanwhile, energy prices increased 5.61% yoy (+6.06% in May), reflecting regulated inflation remains high but is moderating. Durable goods, grew for the first time this year (+0.41% from -0.08% previously), hinting that the tradable drag is shrinking as pass-through from the recent COP weakening filters through to consumer prices.

As supply shocks fade, inflation is likely to retreat towards the central bank’s 3% target. Controlled inflation expectations and the negative output gap would keep inflationary pressures in check. However, the recent increase in food prices constitutes an upside risk to our 3.2% yearend call.


Miguel Ricaurte
Carolina Monzón



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