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

Macro Vision

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Itaú Inflationary Surprise Index - Balanced surprises in February

marzo 7, 2018

The index decreased to 0.02 in February and now is at neutral level

Our Itaú Inflationary Surprise Index decreased to 0.02 in February, coming from 0.08 in January, and now is at neutral level. The main contributions to the retreat of the general index came from the components of Brazil and Mexico. In the first case, January´s inflation surprised to the downside with a result weaker than the floor of market expectations. In contrast, inflation in Chile surprised to the upside at the beginning of the year, influenced by the components of food, housing and transportation. The result of January puts a high bias on our inflation forecast in Chile by the end of the year (2.5%).

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 declined to -0.13 in February, coming from -0.06 in January, owing to the January´s IPCA surprise to the downside. In fact, January´s inflation came in at 0.29%, printing below the lowest of market estimates. The year-over-year change decelerated to 2.86% from 2.95% in 2017. Transportation (0.20 p.p.) and food and beverages (0.18 p.p.) provided the largest upward contributions. On the other hand, housing (-0.13 p.p.) and apparel (-0.06 p.p.) posted negative contributions. In the housing group, the biggest impact came from the decline in electricity bills, following the activation of the green mode in the tariff flag system early in the month. February’s IPCA-15 rose 0.38%, close to expectations. Year-over-year the mid-month inflation decelerated to 2.86% from 3.02% in January. These results are consistent with the view that inflation remains at comfortable levels and with good composition.

Mexico's surprise index receded to 0.34 in February, from 0.50 in the previous month, owing to the moving-average effect. The CPI increased 0.53% in January over the month of December, slightly above market expectations (0.50%). The main source of inflation was energy prices (up by 2.44%) which accounted for half of the CPI print. However, we note that these variations are much smaller than the price spikes observed in January 2017 (gasoline 17%, LPG 18%) when the Mexican government began the liberalization process of energy prices (“gasolinazo”). On the other hand, bi-weekly CPI inflation posted 0.20% in February, below median market expectations (0.26%, as per Bloomberg). Headline inflation decreased to 5.45% year-over-year in the first half of February (from 5.58% in the second half of January), while core inflation decreased to 4.32% (from 4.50%) during the same period.

Chile's surprise index fell to 0.16 in February (0.26 in the previous month). Consumer prices gained 0.5% from December to January, above the 0.3% Bloomberg market consensus and our call. The surprise can be explained by food, housing, and transport items. Even so, annual inflation came in at 2.2%, slightly down from 2.3% in December 2017, and close to the lower bound of the range around the 3% target. January’s surprise puts an upside bias to our 2.5% yearend inflation forecast. However, the strengthening of the Chilean peso and a still-negative output gap will likely contain inflationary pressures.

Colombia´s surprise index increased to 0.23 in February, coming from 0.14 in January. Inflation gained 0.63% from December, below Bloomberg market consensus of 0.66%. As a result, annual inflation slowed to 3.68% from the 4.09% at the close of 2017. Higher food and transport prices were behind the larger than expected monthly consumer price gain. Inflationary pressures should remain contained ahead aided by a negative output gap and the behavior of the exchange rate.

Peru´s surprise index increased to -0.50 in February, coming from -1.15 in January. CPI posted a modest monthly variation of 0.13% in January, below median market expectations (0.2%, as per Bloomberg). Peru’s disinflation process has been driven by falling food prices (reflecting the gradual normalization of agricultural supply after El Niño), but the more recent decrease of core inflation indicates that the negative output gap and, to lesser extent, the stronger currency are also exerting downward pressure.

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%)


Eduardo Marza
André Matcin



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