Itaú BBA - Itaú Inflationary Surprise Index - Unwinding of food prices reduce inflationary pressures

Macro Vision

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Itaú Inflationary Surprise Index - Unwinding of food prices reduce inflationary pressures

octubre 5, 2016

The dissipation of temporary shocks and more stable Exchange rates bring relief to inflation.

Our Itaú Inflationary Surprise Index registered –0.14 in September, coming from neutrality in August. The result marks an environment of lower inflationary pressures in the region, as temporary shocks (food prices) fade and exchange rates remain relatively stable. The largest contributor to the negative reading was Mexico, followed by Brazil and Colombia.  Lower inflationary pressures come at a time when economic activity is surprising negatively in the region. Monetary policy is in turn becoming more expansionary in Latin America, with the exception of Mexico, due to the unfavorable evolution of the Mexican Peso.

The inflation surprise index serves the same purpose and shares the same methodology as the activity surprise index: it compares trends in inflation indicators (rather than activity indicators) released during the month to what analysts had been expecting for them. Like the activity index, 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 three-month moving average in order to avoid excess volatility.

Brazil’s index registered -0.07 in September, down from August’s 0.08. The drop in the index is a result of the latest preview for September inflation (IPCA-15), coming in at 0.23%, below the lower bound of market estimates (0.25%). The twelve-month reading decelerated to 8.8% from 8.9%. Food and beverages were behind the slowdown, with virtually no change (-0.01%) in September, after a 0.8% hike in the previous month. Inflation in services, industrial goods, and regulated prices continue to decelerate. August’s IPCA inflation came in line with expectations, thus making no contribution. In all, we expect inflation to carry on its downward trend in the second half of the year as the food-price shock wanes, in a trend that we expect to consolidate next year. We see IPCA inflation at 7.2% this year and 4.8% in 2017.

Mexico’s index dotted -0.34 in September, stable from the previous month. August’s first half bi-weekly CPI posted a -0.02% variation, below the 0.04% forecasted by the market. The monthly CPI for August came in 3 bps lower than consensus estimates, rising 0.28%. The bi-weekly variation in the first half of September was marked by a large upward surprise, posting 0.54% - while the market consensus was at 0.37%, driven by a spike in agricultural prices.  As a result, headline inflation increased to 2.88% in August from 2.73% in the first half of September. The general trend, however, shows that inflation has been surprising to the downside, driving the index into the negatives for the past five months. Looking forward, we continue to expect inflation to stabilize at the 3% target by the end of 2016, and to stay around that level in 2017. 

Chile’s  index stood at 0.12, up from 0.06 in August. The upward move is due to previous months’ effect on the moving average, as consumer prices came in below market consensus. . Inflation came in at 0.0%, while the market expected a 0.1% increase. Chilean inflation is back in the central bank’s 2% - 4% target range for the first time since November 2015. The disinflation comes as the impact of the exchange rate depreciation on consumer prices fades. Going forward, we expect inflation to remain in the upper half of the target range.

Colombia’s index registered -0.16 in September, down from 0.79 in August. The headline CPI fell 0.32% in July, well below consensus estimates at 0.16%. The monthly decline mainly resulted from the unwinding of food price increases following the conclusion of a truck-driver strike in July. As the exchange rate stabilizes, tradable prices (excluding food and regulated prices) also moderate sequentially, helping to reduce inflationary pressures. We currently expect a 6.9% yearend inflation for 2016, as food inflation continues to decelerate and the currency remains broadly stable.

Peru’s index registered -0.22, up from -0.38 in the previous month. August’s CPI came in at 0.36% month-over-month, above the market consensus (0.30%). The fading of temporary shocks – namely El Niño (crucial for food prices) and exchange rate depreciation – explain the downward trend of inflation. Well-behaved food inflation (harvest season, and thus more supply, is due in Q4) and a stable exchange rate will likely continue to bring inflation down.

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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