Itaú BBA - COLOMBIA – Lower-than-expected inflation to start the year

Macro Latam

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COLOMBIA – Lower-than-expected inflation to start the year

Fevereiro 6, 2020

Moderating service inflation points to well-behaved core price dynamics

Consumer prices gained 0.42% from December to January (0.60% one year earlier), coming in below the Bloomberg market consensus (0.56%) and our 0.53% forecast. The downside surprise was mainly explained by lower than anticipated housing, communication and fuel inflation. As a result, annual inflation inched down from 3.80% in December to 3.62%, while core inflation was steady near the 3% target. With the disinflation process unfolding (within 2% - 4% target) and growth close to potential, the central bank is likely to remain comfortable with keeping the policy rate stable at a mildly expansionary 4.25% for the time being.

Food prices continue to be a key inflation driver (0.75% MoM and 12-bp contribution), but the normalization process following previous shocks is underway (1.25% MoM at the start of 2019). Meanwhile, low pressures from housing expenses (+0.05% MoM; 0.25% one year ago) helped contain inflation. Overall, core inflationary pressure is under control, as the measure excluding food prices rose 0.36% from December (10-bps below last year’s print), while the measure excluding both food and energy prices gained 0.47% MoM (3-bps less than January last year).  

Annual inflation edged down 18-bps at the start of the year to 3.62%, favored by moderating food and energy prices. A key inflation drag continued to come from durable goods (1.87% yoy vs. 1.48% last month), hinting that the pass-through from the accumulated COP depreciation remains low. Additionally, energy prices moderated to the slowest pace since December 2015 by reaching 3.10% (4.0% in December). The pull from food and non-alcoholic prices moderated to 5.13%, from 5.80% at the close of 2019, amid the normalization process. Inflation excluding food and energy prices remained broadly stable at 3.37% (3.40% previously), while service inflation ticking down 14-bps to 3.61% pointed to well-behaved core price dynamics. At the margin, inflation over the last three months (SA, annualized) dropped to 1.9%, from 3.3% in 4Q19 (5.1% in 3Q19), amid moderating energy and service inflation.

We expect inflation to end the year close to the target at 3.3%. Food price normalization, after last year’s supply shock, along with broadly anchored inflation expectations, would limit inflationary pressures ahead.

Miguel Ricaurte
Carolina Monzón

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