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Sequential core inflation pressures moderated further.
2023/08/09 | Andrés Pérez M., Vittorio Peretti, Carolina Monzón & Juan Robayo.

Fuels, utilities and food prices pressured inflation in July. Consumer prices increased by 0.50% from June to July (0.30% in June 2022), above the Bloomberg market consensus of 0.3% and our 0.4% call. The main contributors to the month were utilities (+0.62% MoM, +19bps) and transport (+1.07% MoM; +14bps, amid the fuel price adjustment), while food prices increased 0.22% MoM, adding 4bps from the monthly variation. The rise in food prices (that may be due to transportation challenges along the road between Bogotá-Villavicencio after the avalanche in Quetame) explained most of the surprise relative to our forecast. Meanwhile, core inflation (excluding food and energy) increased by a lower 0.42% from June to July (+0.58% one year earlier). Overall, annual inflation fell 35bps from June to 11.78% (13.34% peak in March), while core inflation dropped from 10.54% to 10.37% (10.60% peak in April). Significant inertia, and the unwinding of fuel subsidies mean the inflation adjustment is unfolding more gradually than in peer economies. Nevertheless, the domestic demand adjustment and the appreciation of the COP (compared to the backend of last year) should contribute to a faster disinflation process and likely open the door to assessing rate cuts during 4Q23. Potential unfavorable effects from a strong El Niño (pressuring food inflation) may result in a cautious approach.

Sequential core inflation pressures moderated. Non-durable goods inflation (mainly food) came in at 15.35% YoY, falling 64bps from the previous month. Meanwhile, amid the phase-out of fuel subsidies, energy prices remain elevated, but still fell 35bps to 22.31% (22.66% peak last month). Durable goods inflation fell from 15.71% to 14.12% (16.8% peaked in January). Services inflation increased 14bps to 9.5%. Overall, core inflation moderated 17bps to 10.37%. At the margin, we estimate that inflation accumulated in the quarter was 7.5% (annualized), broadly unchanged compared to 2Q23, but well down from 14.5% in 1Q23. Meanwhile, core inflation reached 7.6% (annualized), down from 9.0% in 2Q23 (14.1% in 1Q23).

As domestic demand gradually weakens and the effects of lower tradable inflation pressures materialize, the disinflation process will consolidate further. We currently expect yearend inflation of 9.5% with risks tilted to the downside. Our preliminary estimate for August CPI is 0.4-0.5%, leading annual inflation to fall by 0.7pp to 11.1%. The central bank will release the analyst survey on Tuesday August 15, with inflation expectations likely to continue to trend down.