Itaú BBA - COLOMBIA – Upside inflation surprise in July

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COLOMBIA – Upside inflation surprise in July

agosto 6, 2019

The intensity and endurance of the supply shocks likely mean that inflation would end this year at 3.75%.

Supply shocks continue to drive inflation up, but there are signs of propagation to core measures. Consumer prices increased 0.22% from June to July (-0.13% last year), above the 0.18% market consensus and our 0.14% forecast. As a result, annual inflation accelerated to 3.79% (from 3.43% in June). The closure of a key highway – due to a natural disaster – connecting the east of the country with the capital city, Bogotá, continues to pressure prices, particularly food and transportation.

Food, housing related expenses and transportation pulled up the monthly inflation. The gains of Food (0.66%), Housing (0.17%) and Transportation (0.28%) divisions contributed 20bps to the monthly inflation. Meanwhile, apparel (-0.23%) dragged prices down in July amid the annual sales season and despite the weakening of the Colombian peso. Core inflation (ex. food and energy prices) gained 0.11% from June, up from the 0.02% last year, while inflation excluding food and transport also accelerated (to +0.12% MoM from -0.01% one year ago). Additionally, services inflationary pressures also rose (0.13% vs 0% last year). 

Core inflation increased, but remains close to the central bank’s 3% target. Energy prices, an important element of the regulated component, lifted annual inflation with a 5.65% yoy rise (5.61% in June), while the food division jumped 1.6pp to 6.58%. The core measure that excludes food and energy prices ticked up 10bps to 3.08%, the highest rate recorded so far this year, with the alternative measure excluding food and transport prices picking up to 3.30% (from 3.17%). Meanwhile, durable goods remained the key drag to inflation at 0.53% (0.41% previously). Lifted by food prices, non-durable goods inflation accelerated to 5.18%, from 4.38% in the previous month. At the margin inflation over the last three months (SA, annualized) picked up to 5.4% from 2% in 1Q18.

The intensity and endurance of the supply shocks likely mean that inflation would end this year at 3.75%, higher than the 3.4% we had previously expected (3.18% in 2018). Rising inflation would keep the central bank on hold for the time being. Going forward, contained demand-side pressures as growth will likely remain below potential and controlled inflation expectations would see a convergence process towards the 3% target next year.

Miguel Ricaurte
Carolina Monzón

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