CPI posted a bi-weekly rate of 0.02% in the first half of June (from 0.49% a year ago and compared with a five-year median also of 0.32%), below our forecast of 0.14% and market consensus of 0.13% (as per Bloomberg). Core inflation also surprised to the downside, with a bi-weekly rate of 0.11% (from 0.50% a year ago and compared with a five-year median of 0.29%) versus our forecast and market consensus both at 0.22%. Within core CPI, we note core goods non-food stood at a low -0.05% (relative to the 5-year median of 0.46%), while other services also stood at a low 0.18%, relative to the 5-year median of 0.38%. In turn, lower gas and egg prices exerted downward pressure to the non-core CPI.
On an annual basis, headline and core inflation fell to 5.18% in 1H June (from 5.67% in 2H May) and 6.91% (from 7.32%), respectively. Looking at core CPI breakdown, food (10.67%, from 11.28%) and non-food (5.65%, from 6.24%) goods inflation fell further, while services inflation stood at 5.23% (from 5.41%). Other services CPI also fell to 6.63% (from 7.01%).
At the margin, headline and core inflation eased further. Assuming bi-weekly inflation in line with the five-year median variation in the second half of June, the seasonally adjusted three-month annualized headline inflation was 2.22% in June (from 2.96% in May), while core inflation stood at 3.74% (from 4.73%).
Core inflation sub-indexes calculated by the central bank, which help to break down the effect of supply (currency, wages and energy prices) and demand (output gap) shocks on prices, showed inflation closely associated with the output gap (fundamental inflation) fell further in 1H June to 5.61% (from 5.95% in 2H May). Inflation sub-indexes associated to supply shocks of energy commodity prices (7.13% in 1H June, from 7.60% 2H May), currency (6.83%, from 7.27%) and salary (5.77%, from 5.94%) also fell.
Our end of year inflation forecast of 4.5% has a downside bias. Today’s inflation figure is supportive of the central bank cutting rates in 4Q23. We expect a 25-bp rate cut in each of the last two months of the year, reaching a level of 10.75%.