Itaú BBA - COLOMBIA – Lower-than-expected inflation in February

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COLOMBIA – Lower-than-expected inflation in February

Março 6, 2019

Following two consecutive months of downside surprises, inflation is likely to end the year close to the 3% target

Inflation in February came in well below expectations as it reached the central bank’s 3% target, further enhancing the case for stable rates for the time being. Consumer prices gained 0.57% from January (0.71% one year before), compared to our 0.72% forecast and the 0.73% Bloomberg market consensus. The surprise was mainly explained by lower than anticipated food, housing and health inflation. As a result, annual inflation slowed to 3.01% from 3.15% in January. Overall, inflation is under control as effects from El Niño, pass-through from previous Colombian peso depreciation and a high minimum salary adjustment have not resulted in meaningful inflationary pressures. 

Core inflationary pressures are low. The main drag in the month came from the Communications division, which fell 0.12% month-over-month (+0.23% last year). Additionally, Food and Non-Alcoholic Beverage division gained only 0.23% from January, compared to our 0.50% forecast as some vegetables price variations underwhelmed. Meanwhile, the main pull for inflation in the month was the seasonal 4.48% rise in education prices, contributing 0.20 percentage points to the total gain (6.43% last year). Overall, inflation excluding food and energy prices posted a 0.68% rise from January, notably below the 0.91% recorded one year ago.

Annual inflation of 3.01% was the lowest since September 2014. Education (4.92% vs. 6.89% previously) and Housing expenses (4.41% vs. 4.51% previously) were the main divisions lifting inflation in the month. Meanwhile, the Food and Non-Alcoholic Beverage division dragged inflation down (2.29% vs. 2.07% in January). The institute of statistics did not publish the tradable and non-tradable breakdown. However, durable goods inflation, in part reflecting  tradables’ behavior, was still a key drag having contracted 0.20% yoy (-0.08% previously). Non-durable goods inflation, remained broadly stable at 3.29%, while service inflation dropped to 3.35% (3.63% in January). Meanwhile energy inflation, part of regulated prices, remained high at 7.08% (7.67% in January). Inflation excluding food and energy prices moved down to 2.84%, from 3.07% in January. 

Following two consecutive months of downside surprises, inflation is likely to end the year closer to the 3% target than our 3.4% forecast. The still widening negative output gap and controlled inflation expectations would keep inflation low. 
 

Miguel Ricaurte
Carolina Monzón



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