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Core inflation pressures are moderating.
2023/09/08 | Andrés Pérez M., Vittorio Peretti, Carolina Monzón & Juan Robayo

Inflation in August surprised significantly to the upside, driven by food, utilities and transportation. Consumer prices increased by 0.70% from July to August (1.02% in August 2022), above the Bloomberg market consensus of 0.47% and our 0.54% call. The main contributors in the month were food (+1.13% MoM, +22bps) and utilities (+0.61% MoM; +19bps), while transport increased 0.90% MoM, adding 12bps to the monthly variation (driven by the fuel price adjustment). The rise in food prices (likely a result of transitory disruptions to the Llano road network) explained most of the surprise relative to our forecast, along with higher utility price adjustments. Meanwhile, core inflation (excluding food and energy) increased by a lower 0.46% from July to August (+0.71% one year earlier). Overall, annual inflation continues to fall but at a slower-than-expected pace. Annual inflation fell 35bps from July to 11.43% yoy (13.34% peak in March), while core inflation dropped from 10.37% to 10.09% (10.60% peak in April). The large surprise in August’s CPI takes place on the back of a smaller upside surprise July (0.5%, above the Bloomberg market consensus of 0.3%) and was concentrated in the same categories - food, utilities, and transport. The more gradual disinflation process relative to peers in the region may be attributed to the gradual unwinding of fuel subsidies, inertia, and transitory supply shocks, among other factors. The upside surprise all but rules out the likelihood of a rate cut at the September monetary policy meeting even though core inflation is evolving more favorably.

Core inflation pressures are moderating. Non-durable goods inflation (mainly food) came in at 14.63% yoy, falling 72bps from the previous month. Meanwhile, amid the gradual withdrawal of fuel subsidies, energy prices remain elevated, falling a mild 12bps to 22.19% (22.66% peak in June). Durable goods inflation fell from 14.12% to 12.56% (16.8% peaked in January). Services inflation peaked in July, falling 4bps in August to 9.46%. Overall, core inflation moderated 28bps to 10.09%. At the margin, we estimate that inflation accumulated in the quarter was 8.5% (SA, annualized), rising from the 7.3% in 2Q23, (+14.5% in 1Q23). Meanwhile, core inflation reached 6.6% (SA, annualized), falling from 9.1% in 2Q23 (13.8% in 1Q23).

While the disinflation process is set to continue, supported by the softening of domestic demand, lower tradable inflation, and base effects, the large surprise in August suggests the inflation convergence path may be slower. We currently expect yearend inflation of 9.1% with risks tilted to the upside given recent surprises and the uncertainty from El Niño phenomenon. Our preliminary estimate for September CPI is 0.4-0.5%, leading annual inflation to fall by 0.5pp to 10.9%, with milder food price pressures as disruptions to the Llano road network have been resolved. The central bank will release the analyst survey on Friday September 15, with year-end inflation expectations (9.0%) likely to rise.