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Core inflation falling from high levels.
02/06/2023 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra

Stable food prices and falling transportation in the month led to a consumer price increase of 0.1% from April, below market expectations and our call of 0.3%. The monthly variation was well below the 1.2% increase in May last year, resulting in the annual inflation variation falling 1.2pp from April to 8.7%, the lowest rise since February last year (14.1% cycle peak in August). Food and transportation price dynamics, along with tourism packages, played a key role behind the downside surprise to our headline expectation. Core inflation (prices excluding volatile items) rose 0.5%, in line with our expectation, while below the 0.9% last May. In annual terms, core inflation dropped 40bps to 9.9%, back to single-digits for the first time since June last year. Overall, core inflation is unfolding broadly in line with the central bank's central scenario (an average monthly increase of 0.6% during the quarter), which along with consumption and investment dynamics, weaker private job creation and a swiftly correcting CAD consolidate the expectation of a rate cut cycle starting during 3Q23. We see rates ending the year at 9.25% from the current 11.25%.


Core inflationary pressures at the margin are gradually falling, but remain high. Annual tradable prices dropped 1.4pp to 8.7% as food inflation fell 2.1pp to 12.7% (from a 24.7% peak in December). According to our estimates, the basic food basket fell 2.3pp to 12.9% yoy. Meanwhile, energy inflation eased by a further 2.3pp to 5.8% yoy (September peak of 23.9%). Non-tradable inflation is also falling, but somewhat more gradually amid greater inertia, down 0.9pp to 8.8%. Services inflation is down 1.2pp, to 8.1% yoy. At the margin, inflation accumulated in the quarter was 5.4% (SA, annualized; 6.8% in 1Q23 and 8.0% in 4Q22). Meanwhile, core inflation reached 10.2% (SA, annualized; 12.6% in 1Q23 and 5.5% in 4Q22).

We see inflation by year-end at 4.5%. The downside headline inflation surprise offsets part of the upside bias to our call that stemmed from the effects of the minimum wage adjustment. Our preliminary estimate for June CPI is 0.2%, leading annual inflation to fall to 8.0%. The central bank’s analyst and trader surveys will be released next week, with particular interest in inflation expectations and the expected policy rate path.