- August inflation: a bucket of cold water for inflation expectations above 4% for 2023
Today’s was a significant disinflationary surprise for the market, surveys and the Central Bank (BCCh) in all its analytical measures (see our Latam Daily). Market expectations pointed to m/m inflation between 0.3% and 0.5%, which the BCCh had subscribed to by slightly raising its 2023 annual inflation projection from 4.2% to 4.3% (see our Latam Daily). August’s price dynamics put in check 2023 annual inflation expectations above 4% and kept alive Scotiabank’s expectation that inflation would be at 3% by Q2-24. In any case, we anticipate some price reversion (rise) in September (and October) explained by seasonal factors (new cars, bus transportation), fuel prices, delayed effects in some food items due to rains and the exchange rate pass-through on items more directly linked to the exchange rate such as tourist packages and air transportation, among others. For now, we project September CPI between 0.5 and 0.6% m/m, while October would have a new increase within that range. We maintain our 2023 year-end inflation forecast at 3.7% y/y.
Data today showed a 0.1% m/m drop in core CPI (ex-volatiles), also going from 8.5% to 7.4% y/y (charts 1 and 2), largely driven by goods this time, but also showing that services price dynamics are already within their historical norms, confirming the downtrend in core inflation. In this line, we insist that much of the second-round effects which drove non-volatile services inflation at the beginning of the year are no longer present. In Q4-23, the m/m readings for the services basket should continue to evolve around their historical median, which would allow for a rapid convergence to the 3% target, no later than Q2-24.
The diffusion of price gains continues to reflect lower generalized inflationary pressures within the basket. At the aggregate index level, the number of products with m/m price increases represented 50.5% of the total, again at the low end of its historical behaviour in August months. This trend was more pronounced in the case of the items that make up the core basket, whose diffusion dropped to 47.5% and was below its historical range for the first time in recent years. Within the core aggregate, the fall in the inflationary diffusion of the basket of goods stands out (45.9%), while the diffusion within the basket of services remained close to historical average (50.7%).
Market effect: after the rise in nominal swap rates that accompanied the rise in the USDCLP exchange rate and the recent IPoM, this monthly inflation record should generate a further decline in swap rates, which would internalize an acceleration in the pace of reference rate cuts in the coming months.
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