Fynsa
INE published the CPI for Octoberwhich surprised by showing a variation of 0.5% m/m (0.52% m/m), below market expectations (0.9% m/m) and ours (0.8% m/m). Thus, inflation accumulated 11.4% so far this year and 12.8% in twelve months, which represents the second consecutive year-on-year decrease.
During the month, During the month, the increase in the Food division stood out, followed by Transportation, which was partially offset by declines in Home Maintenance, reversing significant increases of previous months.
Of course, the record is positive in the sense of inflationary control, there is no doubt about it. The market needs these signals to start adjusting its expectations, a process that, although it has already been going on for a couple of weeks, will probably accelerate after the surprise. In any case, it is important to mention that we do not believe that inflation is over and that the risks of persistence and slower normalization are still present.
Part of the surprise was explained by significant drops in products with a high relative weight, such as new automobiles, which showed the sharpest monthly drop not only for October, but for the entire series. The same occurred with the entire Home Maintenance division. Similarly, Apparel showed the largest drop for October, although it is not the largest in the series. Being non-volatile products, the variation of the non-volatile CPI surprised much, much more, increasing only 0.1% m/m, the smallest monthly rise since June 2021.
On the other hand, the diffusion index reached 52% and, for the first time in the year, did not break records and was below the October average. The non-volatile Services CPI rose 0.4% m/m, bringing its y/y change down slightly to 7.9%, while the Goods CPI declined 0.3% m/m (vs. a 1.7% m/m rise in September), although its 12-month increase also declined by a smaller amount to 14.9%.
Does this information seem sufficient for us to forecast an advance in TPM cuts? Let's see: the next monetary policy meeting will be on Tuesday, December 6, that is, without knowing the November CPI, which is published the following day. We do not believe that a single piece of data will be enough for the Board to feel comfortable to start with cuts, especially considering that the balance of risks continues to lean towards greater persistence and that the costs of not ensuring convergence could be very high. After that, the January 2023 meeting (at the end of the month), will indeed have two more price data. There I believe that the decision may become data dependent, so it will be in the hands of the November and December records. Therefore, while waiting for that, we maintain our projection that the Central Bank will start a cycle of TPM cuts at the March meeting (which will be in April), just before the presentation of that quarter's IPoM.
For the immediate term, we estimate a CPI change in November of 0.5% m/m, which would keep year-on-year inflation at 12.8%. However, given the recent surprises, we adjust our year-end inflation estimate to 12.5%.
