COLOMBIA - Inflation surprised to the upside pushed by food prices

The effect of rising pressures on inflation expectations will support the start of rate hikes.

Julio Ruiz

6/09/2021


Consumer prices rose 0.45% from July to August, well above the 0.20% market expectation and our 0.25% forecast. The bulk of the surprise to us came from food (explaining 13bps of the 20bp surprise). It was the highest monthly print for August since 2015. The main contributors to the monthly price gain were the 1.08% increase in food and non-alcoholic beverages (contributing 18bps), the 0.99% rise in the restaurants and hotels division (+10 bps), amid the economic reopening, and the housing maintenance prices increasing 0.19% (+6 bps). On the other hand, countering the upside pressure was the 0.18% fall for the communications division (-1bp). On an annual basis, inflation increased to 4.44% from 3.97% in July, reaching the highest rate since April 2017. The new upside surprise will likely continue to lift inflation expectations, which along with the consolidating economic recovery, weakened COP, and a rising external imbalance supports our call that the central bank will start to gradually withdraw monetary stimulus later this month. 

Core inflation is rising. The 47bp increase in headline inflation (to 4.44% YoY) was pulled up by energy prices (+8.32% yoy, accelerating from the 7.87% gain in July; boosted by high global oil prices) and non-durable goods inflation (mainly food) increase from 7.60% to 8.67%. As a result, core inflation rose a milder 23bps to a still-low 2.67%. At the margin, we estimate that inflation accumulated in the quarter ending in August was 5.3% (annualized), moderating from 6.6% in 2Q). Meanwhile, core inflation accelerated to 4.5%, from +2.8% in 2Q21, boosted by restaurants and hotels divisions amid the economic reopening.

 

We expect inflation to rebound to 4.4% this year, from 1.6% in 2020, but risks tilt to higher inflation. The 2.8pp expected increase from last year is unfolding amid the unwinding of Covid-19 subsidy measures, high commodity prices, weak peso, the economic reopening, and persisting global supply constraints.