Fynsa
Many couldn’t believe it. “Finally,” they exclaimed. The monthly drop in the CPI took a significant portion of the market (though not this writer) and the general public by surprise, following twenty-seven consecutive months of increases. The price index in February fell 0.1% compared to January, which also caused year-over-year inflation to drop from 12.3% to 11.9%.
The result was primarily due to declines in the Transportation division—driven by Gasoline and Air Transportation—and in the Food division. Similar to last month, this was offset by significant increases in Apparel, which were slightly above our expectations.
However, there is a catch. It lies precisely in the factors that were behind the decline—the ones that are usually described as volatile. In this case—and in others as well—they certainly played a significant role, but they do not necessarily signal the decline in inflation that we are all hoping for.
In fact, when we calculate price changes excluding volatile items, we find a 0.7% increase compared to the previous month, which meant that, on a year-over-year basis, this indicator not only did not decline but actually rose. This becomes even more significant when we see that the biggest increases were in non-volatile services—products more closely linked to economic activity than goods.
February is behind us. What can we expect for March? Well, we know that this month has a history of high inflation, since many price adjustments typically occur around this time, in addition to certain methodological factors (such as how education costs are measured).
Accordingly, we project that the basket of goods and services of the National Institute of Statistics (INE) would have increased by 1.2% compared to the previous month, which is still below what we observed in the same month last year (1.9% m/m). So, inflation and all, the year-over-year rate would fall again (to 11.2%).
For all of the above reasons, on the eve of the publication of a new Monetary Policy Report (IPoM), we expect the Central Bank not to accelerate the process of interest rate cuts and, in fact, to send stronger signals that rates will remain unchanged for at least one more quarter—a period we do not rule out could extend well into the second half of the year. Similar to what is happening around the world, the inflation problem must be eradicated at its root, even if it means paying a higher—albeit temporary—cost than we had previously anticipated.
