Itaú BBA - COLOMBIA – Inflation in line with expectations at the close of 2019

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COLOMBIA – Inflation in line with expectations at the close of 2019

Janeiro 6, 2020

Food price normalization after the recent supply shocks would aid the expected disinflation process this year

Inflation came in at 3.80% last year (3.84% in November; 3.18% in 2018), within the central bank’s 2%-4% range around the 3% target. In December, prices gained 0.26% from November (0.30% last year), broadly in line with the 0.25% Bloomberg market consensus and our 0.24% forecast. Transportation drove prices in the month, while food prices were the key drag (as recent supply shocks unwind). With inflation expected to gradually converge towards the 3% target and the activity recovery slowly consolidates, a stable policy rate near neutral levels provides the Colombian central bank with sufficient flexibility to respond to significant deviations from its baseline scenario.

Falling food inflation and lower energy prices contained inflationary pressures. Transportation prices rose 0.48% from November (contributing 6bps to the headline variation), and the housing, communication and recreation divisions together contributed 16bps to total inflation. Meanwhile, food and non-alcoholic beverages dropped 0.25% from November (4bp drag), while energy inflation was 0.3% MoM (down from the 0.56% one year ago). As a result, the monthly core inflation (excluding food and energy prices) came in at 0.36%, 10bps above the variation at the close of 2018.

In annual terms, core inflation edged up, but remains close to the target. The headline inflation of 3.80% was 4bps down from the November print and the second consecutive month of moderation. Non-durable goods continued to lift inflation, despite moderating to 4.68% yoy (+4.98% in November). Durable goods, which include an important tradable component, are containing inflationary pressures, despite accelerating to 1.48% yoy from 1.16% in the previous month. Lower energy inflation and food prices are also behind the inflation moderation. Meanwhile, the core measure excluding food prices came in at 3.45%, up 4bps from November, while inflation excluding food and energy prices recorded a 3.40% gain (3.30% in November), the highest rate since October last year. At the margin, inflation over the last three months of the year dropped to 3.4% (SA, annualized) from 5.1% in 3Q19, aided by receding service and non-durable pressures. 

We expect inflation to moderate to 3.5% this year. Food price normalization after the recent supply shocks, broadly anchored inflation expectations, and the gradual narrowing of a negative output gap would contain price pressures ahead. Additionally, the recent appreciation of the Colombian peso will aid the disinflation process.

Miguel Ricaurte
Carolina Monzón

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