Itaú BBA - Itaú Inflationary Surprise Index - Brazil pulls the index further down

Macro Vision

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Itaú Inflationary Surprise Index - Brazil pulls the index further down

noviembre 3, 2016

Inflationary pressures are milder in most countries the region (especially in Brazil).

Our Itaú Inflationary Surprise Index registered –0.28 in October, down from -0.14 in September. Inflationary pressures are milder in most countries the region (especially in Brazil), benefited by more stable exchange rates and the fading of supply shocks (besides Mexico).

The inflation surprise index compares trends in inflation indicators (rather than activity 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 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 a presented as a three-month moving average in order to avoid excess volatility.

Brazil’s index registered -0.32 in October, down from September’s -0.07. Both the IPCA and the IPCA-15 contributed significantly to this result. The IPCA for the month of September registered 0.08%, well below the market’s 0.18% estimate. The IPCA-15 for October registered 0.19%, also undershooting consensus’ 0.21% estimate. The last-12-month rate has now fallen to 8.3%, after hitting 8.8% in September. The main downside surprise in October came from industrial prices, which retreated by 0.05%. Core inflation measures decelerated, as did the diffusion index. In all, we expect further inflation slowdown, a trend that is expected to carry on throughout the next year, amid exchange-rate stability and persistently weak economic activity.

Chile’s index stood at -0.61, down from 0.13 in September. Inflation moved closer to the central bank’s 3% range, following a downside surprise in September. Consumer prices increased 0.2% from August to September, below market consensus forecast of 0.6%. Core inflationary pressures are moderating on the back of a more stable exchange rate and weakening internal demand. The downside surprise led us to lower our yearend inflation forecast to 3.3% (from 3.5%).

Colombia’s index registered -0.83 in October, down from -0.16 in September. Consumer price inflation is unwinding faster than expected, as September marked a 0.05% decline in consumer prices from the previous month, below the +0.1% market consensus. The monthly decline was once again led by falling food prices, reflecting the unwinding of supply-side shocks caused mainly by the El Niño weather phenomenon.

Mexico’s index dotted 0.01 in October, up from -0.34 in September, going the opposite way relative to the aggregate index.  Overall, inflation indicators surprised to the upside. The CPI posted a 0.61% month-over-month increase in September – above market expectations (0.56%) – which was driven by a spike in agricultural prices, core goods (sensitive to exchange rate depreciation), and the seasonal increase of educational fees. Moreover, one of the two Bi-weekly CPI readings released in the month also surprised to the upside, while the other came virtually in line with expectations. We continue to expect inflation to stabilize around the 3% Central Bank target by the end of 2016, but our forecast now carries an upward bias.

Peru’s index registered -0.10, up from -0.22 in the previous month, also opposing the general trend. September’s CPI came in at 0.21% month-over-month, above market expectations (0.15%). CPI inflation temporarily breached the Central Bank’s target range (1%-3%), due to a statistical base effect which we expect to revert in Q4. Higher food prices and exchange rate pass-through explained the bulk of the upward pressure. Underlying inflation measures are stable. Core inflation (which excludes prices of food and energy) posted a 0.11% month-over-month variation, leaving the year-over-year figure at 3.01% (slightly up from 2.96% in August). Our end-of-period forecasts for inflation remain unchanged: 2.8% for 2016 and 2.5% for 2017.

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%)


 

Laura Pitta
Lourenço Paiva


 

 



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