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Core services inflation still without a clear downward trend.
2023/08/24 | Julio Ruiz

Headline CPI increased 0.32% bw/bw in 1H August, broadly in line with market consensus of 0.31% (as per Bloomberg) and above our forecast of 0.41%.  Core inflation, which stood at a bi-weekly rate of 0.19%, was also broadly in line with market consensus of 0.22% (our forecast was at 0.21%).  Looking at the breakdown, core education's bi-weekly inflation rate of 1.40% was above seasonal parameters (5-year and 10-year median of 0.97% and 0.95%, respectively), which was mitigated by the rest of core CPI subindexes. In particular, we note a seasonal fall in tourism related prices after summer vacations. On the non-core CPI, there was a rebound in core gas lp prices (4.25%), which has been a relevant downside driver to headline inflation during 1H23, while volatile agricultural prices also exerted upward pressure (1.61%). Annual headline and core inflation fell further to 4.67% in 1H August (from 4.78% in 2H July) and 6.21% (from 6.52%), respectively. While core goods annual inflation (7.06%, from 7.65%) continues to trend down, core services CPI stood practically unchanged at 5.19% (from 5.18%). At the margin, assuming bi-weekly inflation in line with the five-year median in the second half of August, the seasonally adjusted three-month annualized headline inflation rebounded to 4.03% in August (from 2.56% in July), while core inflation stood at 3.72% (from 3.99%).

Our take: While core inflation continues easing, its breakdown is not showing a generalized downward trend, with core services inflation remaining practically unchanged. Further increases in gas prices, on the non-core index, could also slow the disinflationary process. Our 2023 yearend inflation forecast stands at 4.5%. In this context, our base scenario is for the central bank to start cutting its policy rate in the November meeting with a 25-bp rate cut, but with a bias to delay the start of the easing cycle. 

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Julio Ruiz