Itaú BBA - Itaú Inflationary Surprise Index - Inflationary pressures continue to recede

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Itaú Inflationary Surprise Index - Inflationary pressures continue to recede

diciembre 1, 2016

Inflationary pressures continue to recede in most of the region’s economies.

Our Itaú Inflationary Surprise Index registered –0.37 in November, down from -0.28 in October. Inflationary pressures continue to recede in most of the region’s economies, with Brazil still being the major player pulling down on the index. Even with the recent weakening of LatAm currencies as a result of the US presidential elections, most currencies in the region are recording year-to-date gains against the U.S. dollar (Mexico being the exception), which together with weak activity and the waning of some supply shocks, is supporting disinflation in the region.

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’sindex registered -0.54 in November, down from October’s -0.32. The IPCA, IGP-M, and IPCA-15 indices contributed the most to this result. Industrial goods are at the core of the recent downward surprises, but the main driver behind the inflation deceleration is the reversal of food prices. October’s IPCA consumer inflation came in at 0.26%, lower than the market’s median estimate (0.29%). November IPCA-15 registered 0.26%, also undershooting the market’s 0.28%. The -12-month reading, according to the IPCA-15, decelerated to 7.6% from 8.3%. In our view, fundamentals suggest inflation will continue its descent with the IPCA decelerating to 4.8% in 2017, as economic activity has proven that it has not found bottom yet, and that the rise in uncertainty emanating from future US economic policies does not provoke a substantial depreciation of the exchange rate.

Colombia’s index registered -1.41 in November, down from -0.82 in October. Consumer inflation fell for a third consecutive month in October as prices contracted 0.06% from September. The negative reading was driven by falling food prices and came in below market expectations, which once again anticipated an increase. The unwinding of supply-side shocks, caused by the El Niño weather phenomenon and previous depreciation of the currency, is favoring a faster than expected disinflationary process.

Chile’s index stood at -0.96,down from -0.60 in October. Inflation surprised to the downside for a second consecutive month, rising 0.2% in October, vs. the market’s 0.3%. As such, annual inflation moderated to 2.8%, from 3.1% in the previous month, and is now below the central bank’s target of 3%, after being nearly three years above it. The faster than expected disinflation underway is primarily due to the tradable component, linked to the more favorable evolution of the Chilean peso. Our diffusion index also is pointing to diminished inflationary pressures.

Mexico’s index increased, dotting 0.28 in November, up from 0.01 in October.  The result, however, is mainly due to previous months’ effect on the moving average. Overall, inflation surprises netted a more or less neutral result in the month of November. While headline CPI and one of the two Bi-weekly CPI figures contributed to pull the index down, the latest Bi-weekly reading reverted these results. As for the headline CPI, the index posted a 0.61% month-over-month increase in October – below market expectations (0.64%) – driven by the seasonal increase of regulated electricity prices, an upward adjustment in the maximum price of diesel (set by the Treasury), and the lagged effects of the Mexican peso’s depreciation. Annual headline inflation increased, from 2.97% year-over-year in September to 3.06% in October, and now stands above the Central Bank's 3-percent target for the first time in 18 months.

Peru’s index registered 0.59, up from -0.11 in the previous month. CPI inflation accelerated in October (0.41%) coming well above market forecasts (0.16%), driven by a spike in food prices which deviated significantly from their typical behavior around this time of the year (larger supply normally pulls down food inflation in Q4). Headline inflation jumped from 3.13% year-over-year in September to 3.41% in October, but this jump needs to be taken with a grain of salt because there is a base effect at play which will revert in the last months of Q4. Underlying inflation measures remain stable.

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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