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Swift disinflation process leaves door open for another 100bp rate cut.
2023/08/01 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra

Inflation fell further in July as a growing energy drag is unfolding, along with weaker core price pressures. Inflation rose 0.35% from June to July (1.4% in July last year), somewhat above market expectations (Bloomberg market consensus: 0.3%; asset prices: 0.26%), and broadly in line with our 0.32% call. Core inflation (ex volatiles) rose 0.3% (0.9% last July), broadly in line with our call. Significant inflationary pressures in the month came from food prices (+1.2% MoM; led particularly by beef and potatoes), along with tourism packages (+9.5%; 11bp contribution) and interurban bus travel (10.6%; +6bps), while notable price declines showed up in electricity (-3.6% MoM; -7.5bps), air travel (-6.6%; -6.5bps) and apparel (-2.7%; -7.7bps). Of note, certain services that tend to have a high degree of indexation rose in the month, suggesting second-round effects are persisting. Regarding our monthly estimates, weaker-than-expected transportation price dynamics were offset by greater food and tourism package price pressures. As a result, the annual CPI print fell 1.1pp to 6.5%, the lowest rate since October 2021 (14.1% cycle peak in August). Lower global oil prices are leading to a significant energy inflation correction, with prices contracting 3.0% YoY (from +2.1% in June; 23.9% peak in September last year). Food prices are correcting more gradually, down 80bps to 11% (24.7% peak in December). Core inflation dropped 60bps to 8.5%. Even though today’s print was marginally above market expectations (and the last prior to the Sep 5 monetary policy meeting), the swift disinflation process continues, leaving the door open for another 100bp rate cut in September (to 9.25%).


Inflationary pressures at the margin are weaker. Annual tradable prices dropped 1.5pp to 5.8%, as energy and food inflation dropped 5.1pp and 0.8pp, respectively from June (to -3% and 11%). Non-tradable inflation is also falling, but somewhat more gradually amid greater inertia, down 0.6pp to 7.3%. Services inflation is down 0.8pp, to 6.2% yoy, while core services dropped a milder 30pp to 8.6%. At the margin, inflation accumulated in the quarter was 2.1% (SA, annualized; 6.5% in 1Q23 and 2.4% in 2Q23). Meanwhile, core inflation reached 5.6% (SA, annualized; 11.4% in 1Q23 and 6.1% in 1Q23).


We expect inflation to close the year below our current 4.1% call. The accumulation of lower-than-expected inflation in recent months is consolidating the view of weaker overall pressures. We expect headline inflation to dip into the low 2% during 1H24, before converging to the 3% target by year end 2024. Our preliminary estimate for August CPI is 0.1-0.2%, leading annual inflation to fall 1.1pp to 5.4%. Later this week, the central bank will release the analyst survey, likely to show downside revisions to inflation expectations and rates.