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Services inflation remains elevated.
2023/11/01 |

Inflation in October came in below expectations, but the overall inflation adjustment remains gradual. Consumer prices increased 0.25% from September to October (0.72% in October 2022), below the Bloomberg market consensus of 0.36% and our 0.38% call. The main contributors in the month were utilities (+0.35% MoM, +11bps) and food (+0.2% MoM, +4bps), while transport prices were broadly flat (down 0.02% MoM, 0bps), as fuel prices were not adjusted in the month (but will resume increasing in November as the government subsidy is unwound). The lower-than-expected increase in food, housing, and utility prices explained most of the surprise relative to our forecast.  Core inflation (excluding food and energy) increased 0.24% from September to October (+0.53% one year earlier). Overall, annual headline inflation fell to 10.48% (from 10.99% in September), while core inflation dropped from 9.80% to 9.49% (10.60% peak in April). Even with the downside inflation surprise, the disinflation process remains slow which, along with above target inflation expectations, favors the retention of a significantly contractionary monetary policy. We expect BanRep to begin a gradual easing cycle in 1Q24. 


Core inflation continued to gradually moderate, but services inflation remains elevated. Non-durable goods inflation (mainly food) came in at 12.9% YoY, falling 96bps from the previous month.  Meanwhile, even though fuel prices did not increase sequentially in October, energy inflation remains elevated at 20.89% (22.66% peak in June). Durable goods inflation fell from 9.87% to 7.72% (16.8% peak in January). Overall, core inflation moderated 31bps to 9.49%, but services inflation fell by a milder 9bps to 9.42% (9.51% peak in the previous month). At the margin, we estimate that inflation accumulated in the quarter was 8.7% (SA, annualized), rising from the 7.5% in 2Q23, (+14.3% in 1Q23).  Meanwhile, core inflation reached 6.5% (SA, annualized), up 30bps from 3Q23. 


The gradual disinflation process will continue, slowed by indexation, while the upside risk of El Niño phenomenon persists. We expect a yearend inflation of 9.5%. Our preliminary estimate for November CPI, to be released on December 7, is between 0.4%-0.5%, leading annual inflation to fall to 10.2%. The Central Bank will release the analyst survey on November 16.