Itaú BBA - PERU – Core and headline inflation decelerated in July, increasing the odds of a rate cut in August

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PERU – Core and headline inflation decelerated in July, increasing the odds of a rate cut in August

agosto 1, 2019

Widening output gap conditions curb inflationary pressures

CPI was below market expectations. July’s CPI posted a month-over-month rate of 0.20% (from 0.38% a year ago), below our forecast of 0.32% and market expectations of 0.26% (as per Bloomberg). The CPI figure was pressured mainly by an increase in prices of fishes due to lower production and an increase in bus tariffs associated to national holidays in July. 

On an annual basis, headline and core inflation fell in July. Annual headline inflation came down to 2.11% in July (from 2.30% in June). According to the breakdown, core inflation (excluding energy and food items) fell to 2.15% (from 2.30%). In turn, food and beverage prices decelerated to 1.84% year-over-year in July (from 2.06%). The indicator that tracks the percentage of items with annual inflation above the 2% target increased to 32.1% in July (from 28.3% in June). However, the diffusion index continues to show pretty low inflation across a broad range of goods and services.

At the margin, headline and core inflation also slowed down. The seasonally-adjusted three-month annualized variation of the CPI was 1.85% (from 2.52% in June), while core inflation (excluding food and energy) came down to 1.19% (from 1.76%).

We now expect inflation at 2.1% (from 2.3%) by the end of 2019. Lower inflation together with interest rate cuts by the Fed and weak activity turn a rate cut this month likely. We expect two 25-bp cuts before the year ends (to a level of 2.25%). 
 

Julio Ruiz



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