Itaú BBA - Itaú Inflationary Surprise Index - LatAm inflation keeps surprising to the downside

Macro Vision

< Volver

Itaú Inflationary Surprise Index - LatAm inflation keeps surprising to the downside

julio 4, 2017

Inflation came below median expectations in Brazil and Peru; Mexican indexes surprised to the upside again.

Our Itaú Inflationary Surprise Index oscillated downwards to -0.19 in June, coming from -0.11 in May. Peru’s index registered the largest downside surprise, as the El Niño-led shock on food prices reverted faster than expected by the market. Conversely, Mexican indexes came in above median expectations again, but the magnitude of the surprises was considerably lower than in the previous month. In Brazil, the official inflation index (IPCA) registered a sharp downside surprise.

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 inched down to -0.58 in June, from -0.55 in May. The official and private inflation indexes published in June painted a mixed picture. The IPCA for the month of May printed at 0.31% month-over-month, below the 0.47% figure expected by the market. The year-over-year change in headline inflation slid to 3.60% - the lowest reading since May 2007, according to census bureau IBGE. In contrast, the inflation preview for the month of June (IPCA-15) came in slightly above the median of market forecasts (0.16% month-over-month vs. 0.11%). The family of General Price Indexes registered both upside and downside surprises, but all IGPs showed negative monthly readings again. We expect inflation to continue its long-lasting course of decline, driven mainly by ample slack in the economy and the favorable food-price shock; we revised our IPCA projection for this year to 3.3% from 3.7% - meaning a disinflation of 3 p.p. vis-à-vis the 2016 reading.

Mexico’s index retraced to 0.66 in June from 0.84 in May, as inflation upside surprises moderated in June. The three releases published in the month printed slightly above median expectations, but the magnitude of the surprises was considerably lower. May’s CPI posted 0.12% monthly contraction, a touch above the market’s forecast (-0.13%). Even though surprises subsided in June, underlying inflation trends suggest the presence of second-round effects from the liberalization of gasoline prices and last year’s sharp MXN depreciation. We expect annual inflation to stabilize ahead, before starting a downward trend (ending the year at 5.4%) led by the Peso’s strengthening.

Chile’s index rose to -0.17 in June, coming from -0.27 in May. Consumer price inflation in May posted a low 0.1% month-over-month variation, matching market expectations. The annual headline remained below the 3% target for the eighth consecutive month. In the break down, tradable inflation slowed further to 1.7% from 2.0% in April, on the back of the stable CLP. In contrast, the non-tradable component picked-up slightly (to 3.6% vs. 3.5% in the last month), remaining on a moderate level though. We keep our CPI yearend projection at 2.8%, and continue to see inflation ending 2018 at the 3% target.

Colombia’s index edged closer to zero in June (-0.09 vs. -0.18 in May), owing to the moving average dynamics. The May CPI actually surprised to the downside: prices increased 0.23% month-over-month, below the 0.32% expected by the consensus. The annual headline fell to 4.37% in May (the lowest since February 2015), but core measures remain pressured. In all, the data points to the continuation of the food inflation-led slowdown, as the effect of shocks (El Niño) dissipate. With a widening output gap, loosening labor market and fading supply-side shocks, we see inflation moderating to 4.2% by yearend.

Peru’s index dropped to -0.39 in June, after reaching +0.35 in May. Inflation surprised to the downside, as the effects of the agricultural supply shock on food prices reverted faster than expected by the market. The CPI for the month of May registered another negative monthly variation (-0.42%), lower than the most optimistic expectation surveyed by Bloomberg (median: 0.00%). The drop of food prices explained the bulk of the monthly deflation (-34bps contribution), while the rest of the fall was explained by lower electricity and fuel prices. In all, headline inflation will likely continue moving down as the effects of El Niño on food prices finish reverting and the weaker economy translates into less demand pressure on prices. We expect inflation to decelerate to 2.5% by the end of 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%)


 

Luka Barbosa
Eduardo Marza


 

 



< Volver