Itaú BBA - Itaú Inflationary Surprise Index - Balanced surprises in Brazil

Macro Vision

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Itaú Inflationary Surprise Index - Balanced surprises in Brazil

abril 3, 2018

The Brazilian subindex moved sideways, as inflation releases came virtually in line with analysts’ expectations.

Our Itaú Inflationary Surprise Index oscillated downwards to -0.05 in March, coming from 0.00 in February. The Brazilian subindex moved sideways, as inflation releases came virtually in line with analysts’ expectations. In fact, the breakdown of the official inflation releases did not reveal major surprises, and overall confirmed the favorable inflation outlook. Mexico’s index moderated somewhat, but still remained above zero, as bi-weekly inflation for the first half of March overshot the consensus’ forecast. Nevertheless, we still project disinflation towards 3.7% by year-end in our baseline. The Chilean surprise index fell back to negative territory, as the CLP strengthening and a still wide output gap are keeping inflationary pressures at bay.

The inflation surprise index compares trends in inflation indicators released during the month to what analysts had been expecting for them. The inflation index is a GDP-weighted average of separate indices for Brazil, Mexico, Chile, Colombia and Peru. The inflation index, however, possesses fewer indicators for each country (vis-à-vis our proprietary Activity Surprise Indexes) due to the limited number of inflation indices that are consistently forecasted by agents. As usual, an above-zero reading means inflation overshot estimates. A below-zero reading means inflation came in lower than expected. The index is presented as a three-month moving average in order to avoid excess volatility.

Brazil's index oscillated upwards to -0.11 in March, coming from -0.17 in February. Data releases in the month came in roughly in line with expectations. In fact, the consumer price index IPCA rose 0.32% in February, in matching median of market expectations. The year-over-year change decelerated a bit to 2.84% from 2.86% in January. The breakdown did not reveal major surprises; rather, the monthly result continues pointing to inflation at low levels and with good composition. Likewise, mid-month consumer price index IPCA-15 rose 0.10% in March, also in line with the median of market expectations. The year-over-year change slid to 2.80% from 2.86% in February. Yet again, no major surprises emerged from the index breakdown. The average of the three most used core measures rose 0.20% vs. 0.25% in February, while the year-over-year change slipped to 3.2% from 3.3%. All-in, inflation developments remain favorable, with several measures of underlying inflation at low levels, including the components most sensitive to monetary policy (ie. service prices). For the full year, our estimate for the IPCA remains at 3.5%.

Mexico's surprise index moderated to 0.10 in March, from 0.34 in the previous month. CPI inflation posted a 0.38% month-over-month variation in February, slightly below median expectations (0.41%, as per Bloomberg). Annual inflation decreased to 5.34% in the month (from 5.55%), while the core decelerated to 4.27% (from 4.56%). Conversely, bi-weekly inflation surprised to the upside in the first half of March (0.29% vs. 0.25%), but the inflationary pressure was largely limited to a few items. In fact, the headline fell to 5.17% year-over-year in the period (from 5.23% in the second half of February), while core inflation decreased to 4.15% (from 4.22%). The breakdown paints a brighter picture, as our diffusion index dropped to 57% (from 62.2%), marking a15-month low. Ahead, we project inflation to decrease to 3.7% by year-end. The more benign evolution of the MXN will be the key driver, as the backlog of exchange rate depreciation has likely died out and pass-through is currently exerting downward pressure.

Chile's surprise index fell to -0.08 in March, coming from 0.16 in the previous month. Consumer prices stood broadly flat in February (+0.04% month-over-month), below the median of forecasts surveyed by Bloomberg (0.15%). The CLP strengthening and a still wide output gap are keeping inflationary pressures at bay: annual inflation fell to 2% (2.2% previously), matching the lower bound of the tolerance range around the central bank’s target. Core inflation (ex food & energy prices) remained stable at 1.6%, below the central bank’s target range, which we expect to continue throughout the year, as the output gap remains wide. We see headline inflation at 2.5% by year-end.

Colombia’s surprise index ebbed to 0.05 in March, after printing at 0.24 in February. Monthly inflation registered 0.71% in February, a touch below the Bloomberg market consensus (0.75%). The annual clip decelerated to 3.37% from the 3.68% in January. Although food and tradable prices are the main drivers of the disinflation, we note the more persistent non-tradable component is moderating too, falling below 5% for the first time in more than a year. Going forward, we project inflation to end the year at 3.3%, after nearing the 3% target in the 2Q and 3Q. A broadly stable COP, the negative output gap and less inertia will support an inflation slowdown and aid further disinflation to the 3% target in 2019.

Peru’s surprise index increased to -0.21 in March (-0.50 in February) owing to the moving average dynamics. At the margin, CPI printed below expectations for the sixth consecutive month: prices gained 0.25% month-over-month in February, while the Bloomberg survey median stood at 0.28%. Annual headline inflation moved further below the BCRP’s 2% target (1.18%, from 1.25% in January). Notably, food inflation (-0.53% year-over-year, from 0.22% in January) fell to negative terrain for the first time in almost eleven years. In contrast, core inflation (ex food & energy) remained constant at 1.97% year-over-year. We expect annual inflation to bottom out in March and increase gradually during the rest of the year. We see inflation at 2.2% by the end of 2018. Besides the reversion of base effects, the pick-up of activity will also help to remove downward pressure from core prices.

Methodology Note

Our Itaú Inflationary Surprise Index compares trends in inflation indicators to what analysts had been expecting for them each month. The index considers the month that each indicator is released. For instance, February’s inflation reading released in March will be incorporated to March’s surprise index.

The index is a GDP-weighted average of separate indeces for Brazil, Mexico, Chile, Colombia and Peru. An above-zero reading means inflation overshot estimates. Below zero means inflation came in below expectations. The index is a three-month average in order to avoid excess volatility.

We build the inflation surprise index for each country using inflation indicators for which consensus estimates are normally provided in the Bloomberg survey. The weight of each indicator in the index depends on its importance for the economy. For example, headline consumer inflation numbers enjoy a higher weight than regional inflation indicators or wholesale price indices.

We use the deviation of the actual print from the consensus estimate (surprise), subtract the result from the historical average deviation and then divide the result by the standard deviation of the surprise. This methodology provides a better sense of how important was the surprise in each month.

The weight of each country in the aggregate inflation index depends on the size of its GDP. Brazil has the highest weight, followed by Mexico.

It’s worth noting that, due to revisions in the economic indicators and as lagged announcements, the surprise indices may be revised.

Indicators on which the index is built:

Brazil: IPCA (Headline CPI) (30%), IPCA-15 (30%), IGP-10 (10%), IGP-M (10%), IGP-DI (10%), IPC-S (5%), IPC-FIPE (5%)

Mexico: Headline CPI (50%), Bi-Weekly CPI (50%)

Chile: Headline CPI (100%)

Colombia: Headline CPI (100%)

Peru: Headline CPI (100%)

Luka Barbosa
Eduardo Marza

 



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