Fynsa
The INE published the October CPI, which surprised observers by showing a month-over-month change of 0.5% (0.52% m/m), below market expectations (0.9% m/m) and our own (0.8% m/m). As a result, inflation has reached 11.4% year-to-date and 12.8% over the past twelve months, marking the second consecutive year-over-year decline.
During the month, the Food division saw the most significant increase, followed by Transportation, which was partially offset by declines in Household Maintenance, reversing significant increases from previous months.
Of course, the data is positive in terms of inflation control—there’s no doubt about that. The market needs these signals to begin adjusting its expectations—a process that, although it has already been underway for a couple of weeks, will likely accelerate following this surprise. In any case, it’s important to note that we do not believe that inflation is over and that the risks of persistence and a slower pace of normalization remain.
Part of the surprise was due to significant declines in products with a high relative weight, such as new cars, which posted the sharpest monthly decline not only for October but for the entire time series. The same was true for the entire Home Maintenance division. Similarly, Clothing posted the largest decline for October, although it is not the largest in the series. Since these are non-volatile items, the change in the CPI excluding volatile items was far more surprising, rising by only 0.1% m/m—the smallest monthly increase since June 2021.
Meanwhile, the diffusion index reached 52% and, for the first time this year, did not set a record, falling below the average for October. The CPI for Services (excluding volatile items) rose 0.4% m/m, causing its year-over-year change to decline slightly to 7.9%, while the Goods CPI fell 0.3% m/m (compared with a 1.7% m/m increase in September), although its 12-month increase also declined slightly, to 14.9%.
Do we think this information is sufficient to predict an earlier-than-expected reduction in the TPM? Let’s see: the next monetary policy meeting will be on Tuesday, December 6—that is, before the November CPI is released, which is published the following day. We do not believe that a single data point is enough for the Council to feel comfortable beginning rate cuts, especially considering that the balance of risks continues to lean toward greater persistence and that the costs of failing to ensure convergence could be very high. After that, the January 2023 meeting (at the end of the month) will indeed have two more sets of price data. At that point, I believe the decision may become data-dependent, so it will hinge on the November and December figures. Therefore, pending that, we maintain our projection that the Central Bank will begin a cycle of MPR cuts at the March meeting (which will be held in April), just before the release of that quarter’s IPoM.
For the immediate future, we estimate a 0.5% m/m change in the CPI for November, which would keep year-over-year inflation at 12.8%. However, given recent surprises, we are revising our year-end inflation estimate down to 12.5%.
