Brazil’s February inflation to be closely monitored

Brazil´s IPCA release on the spotlight, Inflation kept falling in Mexico, and Consumer price inflation was muted in Chile.

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Our LatAm Macro Monthly report will hit your mailboxes today, featuring scenarios for Brazil, Mexico, Argentina, Chile, Colombia, Peru and the global economy.


Day Ahead: February’s IPCA inflation will hit the wires today at 9:00 AM (SP Time). We forecast 0.35% gain (consensus: 0.31%), with the 12-month reading broadly stable at 2.9% (consensus: 2.82%). It will be especially important to monitor the trend of core inflation (services and industrial goods) to assess whether the Copom might opt for another 25-bp cut in its March meeting.


Inflation kept falling in February, showing more benign dynamics. CPI inflation posted a 0.38% month over month variation, slightly below our forecast (0.40%) and median expectations (0.41%, as per Bloomberg). Headline inflation decreased to 5.34% year over year in February (from 5.55% in January), while core inflation decreased to 4.27% (from 4.56%) and non-core inflation increased to 8.49% (from 8.44%) during the same period. Moreover, the diffusion index and measures of inflation at the margin decreased meaningfully. The diffusion index, which tracks the percentage of items in the CPI basket with inflation higher or equal to four, went down to 62.5% (from 69.4% in January), reaching the lowest level in a full year. Also, seasonally-adjusted three-month annualized inflation decreased to 3.41% (from 5.22% in January) for the CPI and to 3.74% (from 4.46% in January) for the core index. We expect inflation to reach 3.7% by the end of 2018 (below median market expectations of 4.1%, according to the central bank’s last survey), driven by the more benign evolution of the currency and the normalization of non-core inflation which keeps running at high levels.


Consumer price inflation was muted in the month of February. Consumer prices were broadly flat from January (+0.04%), closer to our 0.1% (more precisely, 0.07%) call than to the 0.2% Bloomberg market consensus, and below the 0.2% increase recorded one year before. The strong performance of the Chilean peso and a still wide output gap are keeping inflationary pressures contained with annual inflation coming in at 2% (2.2% previously), the bottom of the central bank’s 2%-4% target range. With activity showing growing signs of improvement and inflation pressures low, we expect the central bank to stay on hold at this month’s monetary policy meeting (March 19-20).

The main contributor to prices in the month was transportation services (up 0.6%, 0.08pp contribution to total inflation), seasonally high amid the traditional vacation period. The main drags in the month came from the food and non-alcoholic beverage division, falling 0.6% (-0.12pp contribution), led by low fruit prices. In annual terms, inflation is back at the bottom end of the 2%-4% inflation target. The dip to 2% in February was partly explained by food and non-alcoholic inflation slowing to 2.8%, from 3.8% in January, while housing and basic service inflation moderated to 3.3% (4.2% previously). Core inflation (excluding food and energy prices) was stable at 1.6%, below the central bank’s target range, which we expect to continue throughout the year, as the output gap remains wide. We see inflation remaining below the 3% target during the year, with a year-end forecast of 2.5%. With inflationary pressures subdued, we only expect the central bank to begin unwinding the monetary stimulus early next year, once the output gap is narrowing. ** Full Story here.

Fuente: ITAU BBA

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