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Headline inflation fell to one-digit terrain.
2024/01/10 | Andrés Pérez M., Vittorio Peretti, Carolina Monzón & Juan Robayo

Inflation concluded 2023 with a downside surprise, driven by lower-than-expected increases in food and utility prices. Consumer prices increased 0.45% from November to December (1.26% in December 2022), below the Bloomberg market consensus of 0.58% and our 0.63% call. The main contributors in the month were utilities (+0.86% MoM, +26bps) and restaurants (+1.5% MoM, +16bps), while transport prices were subdued (up 0.25% MoM, 3bps), as fuel prices were not adjusted in the month. In contrast, food prices fell 0.42% MoM, subtracting 8bps from the monthly variation. Food price dynamics explained most of the surprise relative to our forecast. Consumer prices excluding food rose 0.66% MoM, broadly in line with our call. Inflation excluding food and energy (core) increased 0.53% from November to December (+0.90% one year earlier). Overall, annual headline inflation fell to 9.28% (from 10.15% in November), returning to one-digit terrain for the first time since June 2022. Core inflation declined from 9.21% to 8.81% (10.60% peak in April). Weakening domestic demand and the favorable effects of the COP’s appreciation will support a gradual disinflation process during 2024. However, the 12% minimum wage adjustment and the continued removal of fuel subsidies would prevent a swifter convergence path. 


Inflation remains well above the target. Non-durable goods inflation (mainly food) came in at 10.49% YoY, falling 189bps from the previous month. Meanwhile, with the increase in electricity prices, energy inflation reached a new peak of 26.05% YoY, increasing 1.1pp from November. Durable goods inflation fell from 5.45% to 3.24% (16.8% peak in January). Core inflation moderated 40bps to 8.81%, while services inflation fell by a milder 6bps to 9.33% (9.51% peak in September). At the margin, we estimate that inflation accumulated in the quarter was 7.3% (SA, annualized), ticking down from the 9.0% in 3Q23. Meanwhile, core inflation reached 6.9% (SA, annualized), broadly steady from 3Q23.


Upside inflationary risks remain, likely preventing an acceleration in the easing cycle in the short term. Uncertainty remains on the intensity and persistence of the El Niño phenomenon on food and energy prices, the unwinding of fuel subsidies and the effects of the larger-than-expected minimum wage adjustment, all in the context of medium-term inflation expectations that remain well above the 3% target. We preliminary expect another 25bp rate cut this month. Following the inflation print, finance minister Bonilla (the most vocal Board member favoring lower rates), highlighted caution given the presence of several risks. We see inflation falling to 4.8% by the end of this year, with risks tilted to the downside amid COP dynamics and weakening domestic demand. The Central Bank will release the analyst survey on January 15.