Itaú BBA - Itaú Inflationary Surprise Index - Chilean inflation surprises to the downside

Macro Vision

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Itaú Inflationary Surprise Index - Chilean inflation surprises to the downside

noviembre 3, 2017

The Chilean index fell deeper into negative territory, driven by the lowest monthly inflation reading on record for September

Our Itaú Inflationary Surprise Index rose to -0.15 in October, coming from -0.22 in September. The Chilean component fell deeper into negative territory, driven by the lowest monthly inflation reading on record for September. Also, the Mexican sub-index turned negative for the first time since January; we expect the downward trend of inflation to accentuate ahead. In contrast, the Brazilian component kept rising for the fourth month in a row, indicating that inflation surprises are moderating.

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 increased to -0.07 in October (-0.43 in September), the fourth consecutive rise. The consumer price index IPCA rose 0.16% month-over-month in September, above our estimate and the median of market expectations (0.09%). As an upshot, the year-over-year change accelerated to 2.54% in the month from 2.46% in August. The largest upward contribution during the month came from transportation (0.14 p.p.), led by fuel prices and airfares. Conversely, the biggest downward contribution came from food and beverages (-0.10 p.p), which posted a fifth consecutive month of deflation. The mid-month consumer price index IPCA-15 climbed 0.34% month-over-month in October, virtually matching the median of market expectations (0.35%). Consequently, the IPCA-15 is up by 2.25% year-to-date, the lowest r esult for the period since 2006, according to census bureau IBGE. In sum, inflation surprises in Brazil are moderating, but price dynamics remain comfortable.

Mexico’s index declined to negative territory in October (-0.18), coming from 0.31 in September. It is the first time Mexico’s index registers a negative reading since last January. The CPI for the month of September came at 0.31% month-over-month, below the median of market expectations (0.43%, as per Bloomberg). Annual headline inflation decelerated to 6.35% (from 6.66%), with the core decreasing to 4.80% from 5%. In the first half of October, bi-weekly inflation came in at 0.62% - a tad below median market expectations (0.64%). Annual inflation ticked up in the period (6.30% vs. 6.17%), but the diffusion index continues to indicate that inflation is becoming less generalized across the CPI basket. Looking ahead, we expect the downward trend of inflation to accentuate in the next months, fal ling to 5.7% by the end of 2017.

Chile’s index dropped to -0.74 in October (-0.60 in the previous month), dragged by the lowest monthly reading for September on record. In fact, the CPI registered a surprising monthly deflation of 0.2% in the month, whereas all economists surveyed by Bloomberg projected a positive reading (median: +0.3%). The headline fell to 1.5% year-over-year in September (previous: 1.9%), edging further below the 2% lower bound around the target. Partly on this surprise, we have lowered our yearend inflation forecast to 1.8% (from 2.4%). Our revision also takes into account the lagged effect of the prolonged strong performance of the CLP. Furthermore, given an atypically low inflation in 3Q17, annual inflation is expected to remain below the 2-4% tolerance range for the next 11 months, ending next year at 2 .8% (for details, see our Macro LatAm CHILE - Revising our inflation scenario, October 10).

Colombia’s index retraced to -0.49 in October, coming from -0.42 in the previous month. Prices increased 0.04% month-over-month in September, below the +0.17% Bloomberg market consensus. Therefore, annual inflation inched up to 3.97% from 3.87% in August, remaining within Banrep’s 2-4% tolerance range for the fourth consecutive month. Inflation excluding food prices decreased to 4.71% year-over-year from 4.81% in August. Moreover, tradable goods prices decreased to 3.41% in the annual comparison (previous: 3.75%), likely benefitting from the exchange-rate performance. On the other hand, non-tradable inflation (ex-food and regulated prices) was stable for the sixth consecutive month at 5.2%. We forecast year-end inflation of 4.2%, but acknowledge downside risks amid a more favorable behavior of inflation in recent months.

Peru’s index stood at 0.33 in October, coming from 0.35 in September. The stability in the moving average contrasts with a sizable downside surprise at the margin. The CPI for the month of September came in slightly negative (-0.02% month-over-month), whereas the Bloomberg market consensus expected a 0.05% monthly gain. Food prices (38% of the index) fell 0.22%, subtracting 9bps from the headline; core prices (excluding food and energy) also fell owing to seasonal factors, the soft domestic demand and FX pass-through. Our base-case is that disinflation will be driven by the reversion of the agricultural supply shock of El Niño and – to lesser extent – by the benign evolution of the PEN and subdued domestic demand. We expect inflation to fall to 1.8% by the end of 2017.< /p>

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



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