- We see a risk of a zero or negative inflation print in June. CLP appreciation continues to do its job
A clear headline surprise for the BCCh and market expectations. May CPI rose 0.11% m/m (8.7% y/y), below survey expectations (BCCh economists survey: 0.4%; BCCh traders survey: 0.3%), forward markets (0.3%) and the Bloomberg consensus (0.3%), but closer to our 0.19% m/m projection (see latest Latam Weekly).
Core CPI (excluding volatiles) rose 0.5% m/m (9.9% y/y), which should not have been a significant surprise for the Central Bank's (CB) baseline scenario. However, at the headline level, the March Monetary Policy Report (MPR) had assumed a cumulative inflation of between 0.5 and 0.6% across May and June, which becomes difficult to achieve considering May's 0.1% reading. With this result, we believe that the BCCh should lower its inflation projection in the MPR to be unveiled on June 20 (which in March saw 4.6% y/y in December 2023) closer to our 3.7% projection.
The basket clearly evidenced lower price pressures in the month, but also lower inflationary persistence. Total CPI diffusion remained at 54.1% (chart 1), around normal levels for the month. In the ex volatiles basket, diffusion continues to decrease, albeit more gradually. On the one hand, services breadth continues to show somewhat greater persistence, still at the high end of the historical range, while goods diffusion has normalized since the beginning of the year. On the other hand, there has been a significant drop in the percentage of products in the basket that have registered consecutive price increases in the last 6 months (chart 2). With the May data, this measure is below its historical averages, both for the total basket and core CPI.
What happened at the core level, the BCCh's preferred measure?
- Half of the 0.5% m/m increase in core prices was explained by 6 products, where 4 of them were services. The increase in the price of bread is the main impact on non-volatile goods. From a historical standpoint, the monthly gain was again within the range of variations of the last 10 years for the second consecutive month.
- Diffusion fell to 58% at core level, close to historical averages.
- Inflationary persistence is being left behind. In the core basket, the percentage of products with consecutive price increases in the last three and six months was below their historical averages.
- Year-on-year core inflation returned to single-digits after 10 months (9.9% y/y).
While May's print should not have been surprising for the CB—which assumes a cumulative core inflation of 0.9% between May and June—we still think that the path to meet this projection faces some headwinds. Preliminarily, we project that the declines in tradable goods that did not occur in May could be captured in June, so we now see a higher risk of zero or negative inflation for the current month.
With these data, market expectations and surveys used by the Central Bank will probably show a new downward adjustment in expected inflation in coming months, where a definitive anchoring of 1 and 2-year expectations looks very likely. Since March of this year, 2-year inflation expectations have already anchored at 3% according to the median of the Economists Survey, while in the Traders Survey this sits already at 3.2%. Given the expectation contained in these surveys for May of 0.4% and 0.3% respectively, inflation of 0.1% represents a genuine surprise of at least 0.2ppts. Asset prices will also reflect a surprise of at least 0.2ppts which should bring a further downward adjustment in break-even inflation by year-end.
DISCLAIMER
This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor any of its officers, directors, partners, employees or affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.
These reports are provided to you for informational purposes only. This report is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any financial instrument, nor shall this report be construed as an opinion as to whether you should enter into any swap or trading strategy involving a swap or any other transaction. The information contained in this report is not intended to be, and does not constitute, a recommendation of a swap or trading strategy involving a swap within the meaning of U.S. Commodity Futures Trading Commission Regulation 23.434 and Appendix A thereto. This material is not intended to be individually tailored to your needs or characteristics and should not be viewed as a “call to action” or suggestion that you enter into a swap or trading strategy involving a swap or any other transaction. Scotiabank may engage in transactions in a manner inconsistent with the views discussed this report and may have positions, or be in the process of acquiring or disposing of positions, referred to in this report.
Scotiabank, its affiliates and any of their respective officers, directors and employees may from time to time take positions in currencies, act as managers, co-managers or underwriters of a public offering or act as principals or agents, deal in, own or act as market makers or advisors, brokers or commercial and/or investment bankers in relation to securities or related derivatives. As a result of these actions, Scotiabank may receive remuneration. All Scotiabank products and services are subject to the terms of applicable agreements and local regulations. Officers, directors and employees of Scotiabank and its affiliates may serve as directors of corporations.
Any securities discussed in this report may not be suitable for all investors. Scotiabank recommends that investors independently evaluate any issuer and security discussed in this report, and consult with any advisors they deem necessary prior to making any investment.
This report and all information, opinions and conclusions contained in it are protected by copyright. This information may not be reproduced without the prior express written consent of Scotiabank.
™ Trademark of The Bank of Nova Scotia. Used under license, where applicable.
Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including; Scotiabank Europe plc; Scotiabank (Ireland) Designated Activity Company; Scotiabank Inverlat S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Casa de Bolsa, S.A. de C.V., Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Derivados S.A. de C.V. – all members of the Scotiabank group and authorized users of the Scotiabank mark. The Bank of Nova Scotia is incorporated in Canada with limited liability and is authorised and regulated by the Office of the Superintendent of Financial Institutions Canada. The Bank of Nova Scotia is authorized by the UK Prudential Regulation Authority and is subject to regulation by the UK Financial Conduct Authority and limited regulation by the UK Prudential Regulation Authority. Details about the extent of The Bank of Nova Scotia's regulation by the UK Prudential Regulation Authority are available from us on request. Scotiabank Europe plc is authorized by the UK Prudential Regulation Authority and regulated by the UK Financial Conduct Authority and the UK Prudential Regulation Authority.
Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V, Grupo Financiero Scotiabank Inverlat, and Scotia Inverlat Derivados, S.A. de C.V., are each authorized and regulated by the Mexican financial authorities.
Not all products and services are offered in all jurisdictions. Services described are available in jurisdictions where permitted by law.