Itaú BBA - Itaú Inflationary Surprise Index - Broad disinflation in Brazil, upward surprises in Mexico

Macro Vision

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Itaú Inflationary Surprise Index - Broad disinflation in Brazil, upward surprises in Mexico

junio 2, 2017

In Brazil, the general price indices (IGPs) registered deeper-than-expected monthly deflation.

Our Itaú Inflationary Surprise Index fell to -0.12 in May, coming from -0.09 in April. Brazil led downward surprises in May, as the General Price Indexes (IGPs) registered deeper monthly deflation than expected by the markets. Peru’s CPI also recorded a below-expected figure, amid a reversion of the agricultural supply-shock triggered by the El-Niño. In contrast, all three of Mexico’s inflation indices exceeded their respective expectations once again.

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 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 went down further in May (to -0.56, from -0.46 in April). The IGP-M for May registered a deeper monthly deflation (-0.93%) than expected by the market (-0.84%). The annual reading dropped to 1.57% - the lowest since March 2010. Likewise, the IGP-DI came in at -1.24% month-over-month, below the market’s -1.04% call. In contrast, the headline IPCA-15 for the month of May came in a bit above expectations (0.24% month-over month vs. 0.20%), but the breakdown is consistent with widespread disinflation. As economic activity fails to show consistent signs of a rebound, the main risks for inflation going forward continue to stem from the political outlook, especially on matters that would interfere with the Social Security reform process in Congress.

Mexico’s index climbed to 0.84 in May from 0.56 in April. Once again, all the three indexes surprised to the upside, with signs inflation is becoming more generalized across the CPI basket. The CPI increased by 0.12% month-over-month, above market expectations (0.06%). We expect annual inflation to decrease to 5.4% by the yearend, owing to the lagged effects of peso appreciation and, to a lesser extent, weaker activity.

Chile’s index fell to negative territory in May (-0.27), coming from +0.15 in April, owing to the moving average effect. Prices increased 0.2% from March to April, matching the consensual view. Annual inflation came in at 2.7% (mkt: 2.7%), remaining below the 3% target for the seventh consecutive month. We expect inflation to stay low for the remainder of the year and see it at 2.8% by yearend.

Colombia’s index oscillated down to -0.18 in May from -0.14 in April. Inflation rose 0.47% from March to April, surprising the market’s 0.38% forecast. The main factors behind the upside surprise were housing inflation and the increase in transports prices, both affected by the unexpected acceleration in some regulated prices (electricity, water and bus transport). Regulated prices increased to 6.75% year-over-year in April, from 4.05% in the previous month. We see inflation declining to 4.1% by yearend, as demand-side inflationary pressure will likely decline ahead amid a loosening labor market, depressed confidence and still-high real rates.

Peru’s index receded to 0.34 in May, after reaching 0.71 in April, amid a retracement of supply-side shocks. The CPI printed negative in April (-0.26% month-over-month), whereas markets had been expecting a nearly flat reading (0.02%). The drop in food prices, due to the partial reversal of the impacts of the coastal El Niño weather phenomenon, explained the entire monthly deflation. In fact, May’s CPI inflation (to be covered in the next report) was negative as well, suggesting the agricultural supply-shock has been almost completely reversed. We project this year’s inflation at 2.6%.

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%)


 

Lourenço Paiva
Eduardo Marza


 

 



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