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Colombia: annual inflation resumed a strong downward trend in May-17. A widespread moderation in prices opens the door for a 50bp rate cut this month

6 de junio de 2017 04:47 PM
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Colombia: annual inflation resumed a strong downward trend in May-17. A widespread moderation in prices opens the door for a 50bp rate cut this month

June 6, 2017 ( Newswire) Credicorp Capital - According to DANE, inflation stood at 0.23% m/m in May-17, below market consensus but closer to our estimate (0.32% and 0.27%, respectively). With this result, annual inflation decreased by 29bp to 4.37%, accumulating a reduction of 459bp since Jul-16 (8.96%) and reaching the lowest level since Feb-15. This time, the slowdown in prices was widespread, with non-food inflation receding 25bp to 5.35% y/y, tradable inflation falling 47bp to 4.88%, food inflation going down by 40bp to 2.09%, and regulated prices decreasing by 51bp to 6.24%. Thus, importantly, ex-food and regulated inflation retreated by 18bp to 5.09%.

We expect a 50bp rate cut by the BanRep in the Jun-17’s policy meeting as a result of: i) the overall disinflation process observed during May-17, which reflects the reversion of both the temporary shocks seen in 1H16 and the VAT hike effect earlier this year, as well as a weak domestic demand, in our opinion; ii) an expected new reduction in inflation expectations following the favorable May-17’s CPI print; and iii) our view of still weak leading indicators in Apr-17 (to be released next week). As for the latter factor, we highlight that Apr-17 had three working days less than Apr-16, which will pose strong downward pressures on activity figures, creating noise in the markets, in our view (recall that forecasts are made on non-seasonally adjusted numbers).

In May-17, the only groups that posted higher variations than total CPI were housing (0.49%) and health (0.43%), while lower prints came from other expenses (0.21%), transportation (0.19%), apparel (0.16%), food (0.07%), education (0.01%), communications (-0.04%), and recreation (-0.1%).

The food group remains as a major driver of the disinflation trend, as the supply-side shocks continue to fade. Specifically, the monthly print strongly surprised the market to the downside (0.39%; Credicorp: 0.15%), while the annual figure slid 40bp to 2.09%, its lowest level since Feb-14. Overall, the low monthly print was mainly explained by the drop of meat, fruits, tubers, and grains, while food away from home inflation remained weak (+0.02%). Conversely, strong increases were observed in some vegetables and legumes such as onions (10.46%), tomatoes (18.9%), and carrots (54.9%). With this overall result, ex-food inflation came in at +0.29% m/m, close to both our forecast and that of the market consensus (0.32% and 0.31%, respectively). Hence, the annual figure decreased 25bp to 5.35%.

As mentioned before, most of core measures dipped. Particularly, regulated inflation fell 51bp to 6.24% after the strong advance observed last month which was caused by the fare rise carried out in the mass transportation system in Bogota, and by specific increases of some utilities’ tariffs. This time, for instance, annual inflation of electricity fell 375bp to 4.9%. Moreover, tradable inflation continued with its strong downward trend, falling 47bp to 4.88%, its lowest level since Jul-15, while ex-food-and-regulated inflation fell by 18bp in May-17 to 5.09%, its second consecutive reduction. These overall results would be explained by the gradual impact of an increasing slack capacity in the economy and more stable FX, in addition to the fading process of the VAT hike effect once it affected a broad number of goods and services along 1Q17.

Conversely, non-tradable inflation remained sticky at 5.25% (+3bp m/m), amid a steady increase of rents, which advanced 6bp to 4.35% y/y. Non-tradable performance would be the only argument against the potential 50bp rate cut in this month’s policy meeting, in our view. In any case, we expect non-tradable inflation to ease ahead on the back of a weak domestic demand, while the slowed economic activity would continue to play a big role in the reaction function of the BanRep.

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