Colombia: Inflation continued in free fall in Jun-20. Cutting our year-end estimate by 60bps
July 6, 2020 (Investorideas.com Newswire) The CPI dropped at an unprecedented pace of -0.38% m/m in Jun-20, way below the expected by the market consensus (-0.1% m/m) and our own forecast (-0.01% m/m). Thus, the annual figure strongly decelerated by 66bps to 2.19%, the lowest level since Dec-13. The downside move was widespread within the CPI basket, as 9 out of the 12 groups posted negative monthly figures, with housing services (-0.53% m/m; -17bps incidence) and apparel (-2.06% m/m; -8bps) standing out. Also, foodstuffs posted the first drop of the year (-0.11% m/m), after the relevant upside pressures observed at the beginning of the shock.
While the ongoing shock on demand is strongly deflationary, the record downside trend observed in consumer prices in the past three months has also been explained by government-induced effects on, mainly, utilities, cellphone services and gasoline. Indeed, while in Jun-20 core measures posted marked slowdowns (e.g. ex-food and energy: -0.27% m/m and -5bps y/y to 1.76%), the effect of government intervention was the main driver again, as regulated tariffs dropped at an historic -1.9% m/m (-0.78% y/y), dragged by utilities.
Specifically, subsidies on public services like electricity (-1.67% m/m) and water (-5.55% m/m), which are decreed at the regional (not country) level, were the main story behind this month’s fall in prices. Those two lines had an aggregated incidence of -15bps on the headline monthly figure. Moreover, in the presentation of the numbers, the director of the local statistical agency (DANE) mentioned that the first of three VAT tax holidays stablished by the government also influenced groups like apparel (-2.06% m/m) and household items (-0.58% m/m), as retailers not only applied the tax discount decreed, but stablished sales strategies to attract consumers after several weeks of absent demand. In any case, we consider that the strong impact of just one tax-free day during the month is rather suspect as prices are usually collected during the whole month and the reversion should be immediate once the VAT becomes reestablished. Thus, it is likely that prices have been reduced not only on temporary basis amid the collapse in demand. Another potential reason is that the DANE took the prices seen during that day as a main reference for the month due to the more reduced information amid the isolation measures. The other two VAT holidays were scheduled for July (the first was already held last Friday, and the other one will be on July 19th), which suggests that prices could continue to be depressed this month consistently with what was reported by the DANE for Jun-20.
All-in, the current mix of demand deceleration and destruction, along with government relief measures for consumers imply that inflation will continue to decelerate ahead and that it will remain at low levels for a considerable period. While the mentioned measures should cause an inverse, upside effect on inflation when reversed, there is a high uncertainty regarding how, when and if the government will scale back this support. For instance, the suspension of the VAT on cellphone services (-34bp aggregate incidence on the headline number in May and June) is scheduled to reverse in Aug-20, but the government has not announced if it plans to roll over it. For now, it seems that inflation will finish this year in the low part of the forecasted range by the BanRep’s staff (between 1% and 3%). After looking at Jun-20 CPI data and considering the further impact expected from government measures, we are cutting our year-end inflation forecast to 1.5%, from 2.1% previously. Recall that the BanRep projected a year-end inflation in the 1%-3% range in its latest Monetary Policy Report.
While the BanRep has clearly signaled that the plunge of inflation and the stark deterioration of economic activity are not the only factors to watch in order to set the monetary policy stance amid the ongoing shock, we think that this record drop in prices is likely to provide further room for additional rate cuts in the short term. Thus, we now see the BanRep continuing with the easing cycle through 1.75% in the repo rate (2.50% currently), after continuous 25bps reductions in each of the upcoming meetings.
- Housing, which is the group with the highest weight in the basket (33%), posted a historic contraction of -0.54% m/m, bringing down the annual figure to 1.74% (-63bps), the lowest level for the group since the inception of the current CPI basket (2009). This, in line with the mentioned subsidies on utilities tariffs. Moreover, the government decreed the freezing of housing rents during the emergency, a measure that also took a toll on headline inflation this month as this line slowed to 0.03% m/m (YTD average: 0.22% m/m; 25.2% weight in the CPI basket).
- Core measures posted a strong, widespread deceleration in Jun-20 amid the structural slowdown of domestic demand and the VAT holiday. Specifically, the annual ex-food gauge fell 60bps to 1.40% y/y, a record-low for the current series, ex-food-and-energy dropped by 52pbs to 1.76% y/y, services eased by 29bps to 2.34% y/y and non-tradable inflation decelerated by 22bps to 2.13% y/y. All this shows both the instant impact on prices of the absent demand of consumers and the mentioned government measures. Also, while tradable goods monthly inflation stood at -0.48% m/m, durable goods reached +0.37% m/m, its highest level since Mar-17, suggesting some FX pressures following the historic depreciation of the COP this year.
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Daniel Velandia, CFA
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