Itaú Inflationary Surprise Index – Better price dynamics in Mexico, more positive surprises in Brazi

The highlight was the moderation of the Mexican index, as September releases hinted at more benign inflationary pressures.

Our Itaú Inflationary Surprise Index edged up to -0.22 in September, coming from -0.26 in August. The highlight was the moderation of the Mexican index, as the inflation releases hinted at more benign price dynamics. The Chilean sub-index fell deeper into negative territory, while the official Brazilian inflation releases surprised to the downside. In contrast, the Peruvian surprise index skyrocketed on the back of the “lemonade effect”.

The inflation surprise index compares trends in inflation indicators released during the month to what analysts had been expecting for them. The inflation index is a GDP-weighted average of separate indices for Brazil, Mexico, Chile, Colombia and Peru. The inflation index, however, possesses fewer indicators for each country (vis-à-vis our proprietary Activity Surprise Indexes) due to the limited number of inflation indices that are consistently forecasted by agents. As usual, an above-zero reading means inflation overshot estimates. A below zero reading means inflation came in lower than expected. The index is presented as a three-month moving average in order to avoid excess volatility.
Brazil’s index stood in negative territory in September (-0.43), coming from -0.45 in August. The IPCA recorded a 0.19% increase in August, falling short of the most optimistic expectation (median: 0.30%). As a result, the year-over-year variation decreased to 2.46%, coming from to 2.71% in the previous month. The main upward contribution in the month came from fuels (0.32 p.p.), reflecting the tax increase on gasoline, ethanol and diesel, in effect since July 20. On the other hand, the food group posted a negative variation for the fourth consecutive month, with a contribution of -0.27 p.p.. Moreover, the mid-month consumer price index IPCA-15 rose 0.11% in September, a touch below the median of market expectations (0.13%). Private inflation gauges came mixed, with the IGPs printing above expectations and the IPC index missing median analysts’ forecasts. In all, inflation remains at comfortably-low levels.

Mexico’s index moderated to 0.29 in September, coming from 0.41 in August. In a nutshell, inflation data is showing more benign price dynamics across both core and non-core components. In the first half of September, bi-weekly inflation came at 0.34%, below median market expectations (0.40%, as per Bloomberg). For the same period, headline annual inflation fell to 6.53% year-over-year (from 6.74%), while core inflation decreased to 4.90% (from 4.98%). Going forward, we expect the inflation downward trend to accentuate in the next months, echoing the lagged effects of the MXN appreciation observed so far this year. We project year-end inflation at 5.7%.

Chile’s index fell to -0.62 in September, coming from -0.48 in August. Consumer prices increased 0.2% from July to August, falling short of the Bloomberg market consensus of 0.28%. Low growth, inertia and the favorable performance of the CLP, combined with well-anchored inflation expectations, will likely contain inflationary pressures. We expect inflation to remain low for the remainder of the year (2.4% year-end) and to remain below the target in 2018 (2.8% year-end).

Colombia’s index increased to -0.42 in September, coming from -0.62 in the previous month. The 0.14% monthly price gain surpassed the +0.12% market consensus. In the breakdown, tradable inflation (ex-food and ex-regulated prices) remains low (-0.8% month-over-month, +0.25% one year prior) likely favored by sales and promotions in the retail sector and the lagged effect of the COP strengthening in 1H17. On the other hand, non-tradable inflation continues to reflect inertia in price gains (+0.24% versus +0.22% 12 months before). We expect inflation to end the year at 4.2%.

Peru’s index jumped to 0.35 in September, coming from -0.80 in August, owing to a food-supply shock. The CPI increased 0.67% month-over-month, above median market expectations (0.41%, as per Bloomberg), on the back of a combination of sharp price increases for lemons and regulated water tariffs. The “lemonade effect” (as the lemon price surge was dubbed by BCRP’s chairman) accounted for virtually all of the mother-over-month inflation observed in August. Thus, we have increased our inflation forecast for 2017 (to 2.6%, from 2.5%). In our view, the reversion of the agricultural supply shock of El Niño, together with the weakness of domestic demand and the lagged effects of PEN appreciation will gear disinflation going forward.

Methodology Note
Our Itaú Inflationary Surprise Index compares trends in inflation indicators to what analysts had been expecting for them each month. The index considers the month that each indicator is released. For instance, February’s inflation reading released in March will be incorporated to March’s surprise index.

The index is a GDP-weighted average of separate indeces for Brazil, Mexico, Chile, Colombia and Peru. An above-zero reading means inflation overshot estimates. Below zero means inflation came in below expectations. The index is a three-month average in order to avoid excess volatility.

We build the inflation surprise index for each country using inflation indicators for which consensus estimates are normally provided in the Bloomberg survey. The weight of each indicator in the index depends on its importance for the economy. For example, headline consumer inflation numbers enjoy a higher weight than regional inflation indicators or wholesale price indices.

We use the deviation of the actual print from the consensus estimate (surprise), subtract the result from the historical average deviation and then divide the result by the standard deviation of the surprise. This methodology provides a better sense of how important was the surprise in each month.

The weight of each country in the aggregate inflation index depends on the size of its GDP. Brazil has the highest weight, followed by Mexico.

It’s worth noting that, due to revisions in the economic indicators and as lagged announcements, the surprise indices may be revised.
Indicators on which the index is built:

Brazil: IPCA (Headline CPI) (30%), IPCA-15 (30%), IGP-10 (10%), IGP-M (10%), IGP-DI (10%), IPC-S (5%), IPC-FIPE (5%)

Mexico: Headline CPI (50%), Bi-Weekly CPI (50%)

Chile: Headline CPI (100%)

Colombia: Headline CPI (100%)

Peru: Headline CPI (100%)
Luka Barbosa
Eduardo Marza

Fuente: ITAU BBA

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