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Service pressures remain on the up

Vittorio Peretti & Carolina Monzón


A large 1.78% MoM inflation print was recorded at the start of the year, leading to a continued rise of annual prices. The monthly increase came slightly below our 1.83% call and the 1.87% Bloomberg consensus. Transportation prices were a key driver of the monthly gain (3.98% MoM; +51bp contribution), along with restaurants and hotels (3.11% MoM), and food prices (+2.46%; +49bps). Consumer prices excluding food and energy goods increased 1.61% from December (1.17% in January 2022). In annual terms, inflation rose to 13.25% in January from 13.12% in December, while core inflation rose from 9.23% to 9.71%. With large twin deficits, a moderate softening of domestic demand and the labor market, and de-anchored inflation expectations, we believe the tightening cycle has yet to conclude. At the next monetary policy meeting (March), the central bank will likely opt for another rate increase, albeit of a smaller magnitude. We see the cycle ending at 13.25%, but with risks tilted towards higher interest rates.

Food and energy pulls are showing signs of easing, but services remain on the up. Non-durable goods inflation (mainly food) came in at 21.39% yoy (-82bps). Meanwhile, energy prices posted some relief, falling 13bps to 17.75% (19.04% peak in October). Nonetheless, services inflation rose 84bps to 8.19%, while durable goods inflation rose to 16.82% from 16.10% one month earlier. At the margin, we estimate that inflation accumulated in the quarter was 15.0% (annualized), up from 13.9% in 4Q22. Meanwhile, core inflation reached 12.0% (annualized), accelerating from 10.7% in 4Q22 and 9.7% in 3Q22.

We expect inflation to peak during 1Q23. Inflation would remain pressured at the start of the year given strong inertia, still elevated food prices and pass-through. We expect a slow disinflation process to around 8.7% by yearend 2023.

Vittorio Peretti

Carolina Monzón