Headline CPI increased 0.27% mom in March (from 0.99% a year ago and a five-year median figure of 0.39%), slightly below market consensus of 0.29% (as per Bloomberg) and our forecast of 0.30%. Downside pressure to headline CPI came mainly from the non-core component (mainly from volatile food and gas prices). Core inflation stood at 0.52% (from 0.72% a year ago and 5-year median of 0.34%), slightly above market expectations of 0.51% and our forecast of 0.50%. Main upside pressure to core inflation came from services CPI (0.62% versus 5-year median of 0.40%) driven by other services (0.97% versus 5-year median of 0.68%) which reflect pressure from restaurants and tourism packages & airfares (associated to easter holidays).
On annual basis, headline inflation fell to 6.85% yoy in March (from 7.62% in February) aided mainly by the non-core component (3.27%, from 5.65%). Core inflation fell at a slower pace to 8.09% (from 8.29%) aided by core food (12.95%, from 13.70%) and non-food (6.93%, from 7.22%) CPI. In contrast, core services inflation accelerated to 5.71% (from 5.55%) pressured mainly by other services (7.72%, from 7.51%). Our diffusion index, looking at the percentage of items with annual inflation above the upper bound of the central bank target, stood at still high 82.9% in March.
At the margin, headline inflation slowed at a faster pace than core inflation in March. Using seasonally adjusted figures, the three-month annualized measure of headline inflation was 4.47% in March (from 5.33% in February), while core prices fell to 7.21% (from 7.32%).
Core inflation sub-indexes developed by the central bank, which help to break down the effect of supply (currency, wages and energy prices) and demand shocks (output gap) on prices, indicate that inflation closely associated with the output gap (fundamental inflation) fell to 6.74% in March (from 7.13% in February). The components of core inflation affected by energy commodity prices, salary and currency stood at 8.23% in March (from 8.12% in February), 6.37% (from 6.48%) and 7.93% (from 7.81%), respectively.
In our view, an additional 25-bp rate hike in May’s meeting (reaching a terminal rate of 11.50%) is still live given core inflation falling only gradually with services inflation increasing. Looking ahead, we think that the central bank will not start cutting rates until the first half of next year.