Itaú BBA - COLOMBIA – Food drives inflation surprise again

Macro Latam

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COLOMBIA – Food drives inflation surprise again

mayo 6, 2019

We expect inflation to end the year at 3.0% target, however, there are upside risks

April inflation came in at 0.50% MoM (0.46% last year), above the Bloomberg market consensus estimate (0.39%) and our 0.42% forecast. The surprise to us was mainly explained by higher than anticipated food and housing price gains. As a result, annual inflation accelerated to 3.25% from 3.21% in March. However, inflationary pressures are likely transitory (especially those related to food stuffs), so we expect price gains to moderate going forward, allowing the Central Bank to maintain course and leave the policy rate unchanged at 4.25% throughout the year. In fact, food prices were up by 1.07% month-over-month, contributing 16-bps to headline inflation, as the seasonal effect of Easter holiday prolonged the impact of transport disruptions at the turn of the month. 

Inflation excluding food and energy remains close to Central Bank’s 3% target. Headline inflation ticked up to 3.25% (3.21% previously), as moderating energy inflation (7.02% yoy vs 8.08% in March) was offset by rising food and service inflation. Inflation of the Food and Non-Alcoholic division ticked up 0.2pp to 3.44% inflation, while service inflation accelerated to 3.44% (3.25% previously), ending a quarter of declines. Meanwhile, non-durable goods inflation slowed to 3.89% from 4.03%, while durable goods, which include an important tradable component, remained a steady drag to inflation (-0.17% yoy). Inflation excluding food and energy prices increased to a still-low 2.95% (2.81% in March). At the margin, the three-month accumulated and annualized inflation picked up to 2.6% as of April, from 1.9% as of March.

We continue to expect inflation to end the year at the central bank’s 3.0% target (3.18% in 2018), as the output gap remains negative, transitory food-price shocks dissipate and assuming that the exchange rate remains well-behaved. However, there are upside risks. Besides the global pork-crisis, an increase of tariffs on imports of textiles could pressure inflation up. Furthermore, changes in external financial conditions could hit the Colombian peso by more than many other EM currencies, given the country’s wide current account deficit. 

Miguel Ricaurte
Carolina Monzón

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