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Inflationary pressures at the margin are easing

Andrés Pérez M. & Vittorio Peretti


Food prices led the CPI to increase 0.3% from November to December (0.8% a year earlier), coming in line with our call, while a tick above the Bloomberg market consensus (0.2%). The monthly increase was 20bps below the central bank’s analyst survey released last month. Food and beverages (1.1% mom; +25bps), and tourism packages (+13bps) were the main price drivers in the month. The upside pull was partly offset by the drop in transportation prices (-8bps; led particularly by falling air travel), and apparel (-5bps). Consumer prices excluding volatile items rose 0.3% (0.7% in December 2021). In annual terms, inflation fell 50bps to 12.8%, resuming the downward trajectory from the 14.1% August peak. Inflation concluded the year well above the central bank’s 12.3% estimate in the December IPoM. Inflation excluding volatiles fell 30bps to 10.7% (IPoM: 10.4%). While there are consolidating signs that inflation is gradually correcting, levels remain high and risks persist. We expect the central bank’s board to wait for inflation to consolidate its decline towards the 3% target and for the re-anchoring of medium-term inflation expectations before beginning an easing cycle. We see rate cuts starting mid-year.

Inflationary pressures at the margin are easing.Annual tradable prices dropped 0.4pp to 15.9%. Nevertheless, food inflation continues to trend up rising 70bps to 24.7%. Meanwhile, energy inflation eased 1.0pp to 20.4% yoy. Non-tradable inflation fell 0.7pp to 9.0%, despite services prices remaining steady between October and November and dipping 20bps to 9.1% yoy. According to our estimates, the basic food basket rose 2pp to 30.3% yoy, from 27% in November, raising pressure to support households with additional measures. At the margin, inflation accumulated in the final quarter of 2022 was 8.9% (SA, annualized), while core inflation was at 6.7% (annualized), from cycle peaks of 18.2% and 12.8%, respectively (during the May quarter).

Several factors should support the disinflationary process this year, including cooling domestic demand (we expect a 1.1% GDP contraction this year), elevated inventories, normalizing global supply chains and lower oil prices. Nevertheless, significant inertia, risks of additional fiscal expenditures, and the introduction of VAT on previously exempted services at the start of the year should keep inflationary pressures elevated and prevent a swifter correction. We see inflation ending 2023 at 4.3%. Our preliminary estimate for January CPI is 0.6%, leading annual inflation to 12.1%. The analyst survey will be released on Monday, with particular interest in the evolution of 2-yr ahead inflation expectations, currently at 3.5%, and steady between November and December.

Andrés Pérez M.

Vittorio Peretti