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Core inflation has likely peaked.
09/06/2023 | Vittorio Peretti & Carolina Monzón

Food price decline pulls headline inflation down, while core price dynamics remain sticky. Consumer prices increased by 0.43% from April to May (0.78% last May), below the Bloomberg market consensus of 0.65% and our 0.54% call. The main contributors in the month were utilities (+0.92% MoM; +28bps) and transportation (+1.19% MoM; +16bps), amid the recent fuel price adjustment; while food prices fell 0.85% MoM, dragged by fruits and vegetables, subtracting 17 bps from the monthly variation. Falling food prices explained the bulk of the downside surprise relative to our forecast. Meanwhile, core inflation (excluding food and energy) increased by 0.58% from April to May (+0.63% one year earlier). Overall, annual inflation fell to 12.36% (from 12.82% in April), while core inflation (excluding food and energy) fell slightly from a peak of 10.60% to 10.54%. The recent central bank analyst survey has shown falling short-term expectation but a stickier, above target, medium-term outlook. Nevertheless, signs of softening domestic demand, a COP appreciation, and a downside CPI surprise, are likely to push inflation expectations further down.


Core inflation has likely peaked. Non-durable goods inflation (mainly food) came in at 16.80% yoy, falling 133bps from the previous month. On the other hand, the phase-out of fuel subsidies is leading to higher energy prices, up 143bps to 22.34% (a cycle peak). Services inflation rose 4bps to 9.41%, while core inflation moderated 6bps to 10.54% (the first downside correction since late 2021). At the margin, we estimate that inflation accumulated in the quarter was 8.3% (annualized), down from 14.8% in 1Q23 and 13.8% in 4Q22, despite accelerating energy price pressures. Meanwhile, core inflation reached 10.7% (annualized), from 14.1% in 1Q23 (9.9% in 4Q22). 


Weakening domestic demand and lower tradable pressure from COP appreciation should support a gradual disinflation process. Even though food prices are correcting, the materialization of El Niño later this year will raise food price pressures, and both the phase-out of the fuel subsidy and inertia is likely to limit a significant.