Itaú BBA - COLOMBIA – Transitory inflation pick-up in March

Macro Latam

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COLOMBIA – Transitory inflation pick-up in March

abril 8, 2019

As the food price uptick passes, inflation would return towards the 3% target.

Inflation accelerated in March, partly due to transitory factors. Consumer prices gained 0.43% from February (0.23% one year ago), coming in above the median of Bloomberg expectations (0.32%), but in line with our 0.44% forecast. As a result, annual inflation accelerated to 3.21%, after touching the central bank’s 3% target in February. The transitory nature of the recent uptick in food prices, a broadly stable currency, and a still-wide output gap would contain inflationary pressures, thus leading to stable rates ahead.

Housing, Food and Non-Alcoholic Beverages drove inflation in March. The main contributors to monthly inflation were the 0.67% rise in housing expenses (explaining 0.22pp of the headline gain; +0.44% one year before), led by higher electricity and rent, and the 0.95% growth in the food and non-alcoholic beverage division (contributing 0.14pp; +0.02% in March 2018). Protests blocked a key artery in the southwest of the country, pushing up fresh fruit, plantain and potatoes prices in March. Meanwhile, entertainment (-0.50% mom) and telecommunication prices (-0.13% mom) were the main drags in the month.

Despite annual inflation picking up for first time since October, prices gains moderated at the margin. Annual inflation accelerated to 3.21% (3.01% in February), lifted by energy inflation of 8.08% (7.08% in February, the highest since July 2016), reflecting still high regulated prices, pressured by falling hydroelectric reservoir levels. Non-durable goods inflation accelerated to 4.03% from 3.29% driven by food prices. Hence, inflation excluding food and energy prices moderated to 2.54% (2.84% in February). Within this group, durable goods, which include an important tradable component, remained a drag to inflation by contracting 0.17% from last year (-0.20% previously). Despite, the uptick in the month, inflationary pressures remain low. We estimate that at the margin, headline inflation accumulated (and annualized) in 1Q19 slowed down to 1.8% from 3.6% in 4Q18.

We expect inflation to end the year at the central bank’s 3.0% target (3.18% in 2018), as the shock from food prices diminishes. The negative output gap and controlled inflation expectations would keep inflation at bay.

Miguel Ricaurte
Carolina Monzón

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