Itaú BBA - COLOMBIA – Significant disinflation in May

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COLOMBIA – Significant disinflation in May

Junho 8, 2020

As inflation drops swiftly and the activity slump consolidates, the central bank will likely deem it is necessary to persist with monetary easing

In May, consumer prices retreated 0.32% from April, well below our +0.09% forecast (also the market consensus) and last year’s 0.31% gain, as slumping domestic demand along with measures from authorities (subsidies and tax exemptions) are driving the inflationary pressure decline. The price evolvement was the lowest May reading in more than a decade, and the bulk of the surprise to us came from communications, transport and housing expenses. Annual inflation fell from 3.51% in April to 2.85%, sitting below the central bank’s 3.0% target for the first time since September 2014. As inflation drops swiftly, and the activity slump consolidates with lockdown measures moving into a third month, the central bank will likely deem it is necessary to persist with monetary easing.   

The main drag in the month came from the communications division, but price reductions were widespread. Communications fell 3.12% from April (subtracting 0.13pp from headline inflation) as some mobile internet services were exempt from VAT to aid with the stay-at-home orders. Additionally, household appliances and other goods fell 1.69% (subtracting 0.07pp), dragged by cleaning products (possibly some payback following the stockpiling-led uptick in April). Housing and transportation divisions also contained inflationary pressures as they fell 0.20% and 0.47%, respectively, on the back of subsidies to utilities and the reduction in fuel prices. Countering price falls were health (+0.43% mom) and food (+0.28%) components. Core prices (excluding food and energy prices) fell 0.22% from April, well below the 0.27% gain last year.

Beyond fuel prices, core consumer price dynamics continue to drag annual inflation down. While global oil market developments mean that energy prices (shrinking 1.22% yoy, from +1.15% in April) remain a key drag to headline inflation (down 0.7pp to 2.85%), core dynamics are also contributing. Excluding food and energy prices, core inflation dropped 0.6pp to 2.28%, the lowest rate since 2010. Additionally, durable goods inflation remained low at a broadly unchanged 1.56% yoy. At the margin, we estimate that inflation accumulated in the quarter was 0.7% annualized, dropping from 2.9% in 1Q20, while core prices fell 0.6%, from 2.0% in 1Q20 and 3.5% in 4Q19.

We see inflation moderating to 2.5% this year (3.3% in 2019). Food price normalization after recent shocks, anchored inflation expectations, a stronger COP and a significantly widening negative output gap would keep inflationary pressures contained.

Miguel Ricaurte
Carolina Monzón


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