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Food prices are swiftly correcting, but El Niño risks loom.
11/07/2023 | Andrés Pérez M., Vittorio Peretti & Carolina Monzón

A food price decline dragged headline inflation in June. Consumer prices increased by 0.30% from May to June (0.50% one year earlier), below the Bloomberg market consensus of 0.40% and our 0.46% call. The main contributors in the month were utilities (+0.48% MoM; +15bps) and transportation (+1.08% MoM; 14bps), driven by fuel price adjustments; while food prices fell 0.53% MoM, dragged by tubers and vegetables, subtracting 10bps from the monthly variation. Housing and utilities prices explained most of the surprise relative to our forecast. Meanwhile, core inflation (excluding food and energy) increased by 0.38% from May to June (in line with the increase last year). Overall, annual inflation fell to 12.13% (from 12.36% in May), while core inflation (excluding food and energy) remained stable at 10.54%. Even though, inflation surprised to the downside, headline and core inflation remain elevated, albeit with more favorable sequential dynamics. Additionally, with activity only starting to show signs of weakening, a still resilient labor market and significant uncertainty from El Niño, we believe the bar is high for rate cuts to occur this year. Nevertheless, if the significant COP appreciation consolidates, a swifter inflation adjustment may unfold over the next half of the year, raising the possibility that easing discussions may start during 4Q23.


Core inflation remains steady in annual terms, but sequential dynamics improve. 

Non-durable goods inflation (mainly food) came in at 15.99% yoy, falling 81bps from the previous month. Meanwhile, the phasing-out of fuel subsidies is leading to higher energy prices, up 32bps to 22.66%, reaching a new cycle peak. Durable goods inflation fell from 16.21% to 15.71% (16.8% peaked in January). Services inflation fell 5bps to 9.36%. Overall, core inflation remained stable at 10.54%. At the margin, we estimate that inflation accumulated in the quarter was 6.8% (annualized), down from 14.7% in 1Q23. Meanwhile, core inflation reached 9.1% (annualized), moderating from 14.1% in 1Q23.



Food prices are swiftly correcting, but El Niño risks loom. The gradual reduction of the fuel subsidy, significant inertia and an expectation that food disinflation stalls amid the materialization of El Niño lead us to an above-consensus 9.5% inflation call for this year.