Itaú BBA - COLOMBIA – Controlled inflation in November as shocks start to unwind

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COLOMBIA – Controlled inflation in November as shocks start to unwind

Dezembro 6, 2019

So far, only a mild pass-through from the depreciation of the Colombian peso has materialized

In November, consumer prices increased 0.10% from October, a touch below our 0.14% forecast and the 0.16% market consensus. Despite annual inflation inching down to 3.84% from 3.86% in October, it remains close to the upper bound of the Central Bank’s range around the target (2%-4%). Food price normalization after the recent supply shocks, broadly anchored inflation expectations, and a still-negative output gap would contain additional pressures ahead, but pass-through from the currency depreciation constitutes an upside risk. We expect the central bank to keep the policy rate stable at 4.25% going forward. The mix of a gradual activity recovery and controlled inflation expectations allows the board to hold rates near neutral levels, ready to respond to any significant change to the economic scenario. 

Housing-related expenses (+0.30% mom) led the consumer price increase in November, alongside restaurants and hotels. Electricity, rentals and gas prices drove the housing division increase, together contributing 9bps to the headline figure. On the other hand, food and non-alcoholic beverages (-0.47%; 7bps) were the primary drag. Core inflation (excluding food and energy prices) came in at 0.15% from October, above the 0.11% variation one year ago.

Annual inflation was broadly stable at 3.84%, favored by controlled durable goods inflation (1.16% vs. 0.81% in October), reflecting only a mild pass-through so far from the depreciation of the Colombian peso. Meanwhile, the core measure excluding food prices came in at 3.39%, ticking up from 3.33% in the previous month, while inflation excluding food and energy prices recorded a 3.30% gain (3.25% in October), the highest rate in more than a year, albeit still close to the target. Non-durable goods continue to lift inflation, despite moderating to 4.98% yoy (+5.10% in October). At the margin, inflation over the last three months (SA, annualized) inched down to 4.3% from 5.2% in 3Q19, aided by receding food and transportation pressures.

We expect inflation to end the year close to 4.0% (3.18% in 2018). Looking towards 2020, inflation would decline from the current levels as still-controlled inflation expectations and the negative output gap will keep inflationary pressures in check. We expect inflation of 3.5% by yearend 2020.

Miguel Ricaurte Carolina Monzón

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