Fynsa
Recently, INE reported that the CPI for May increased 0.3% versus the previous month, which was in line with our estimates, although above what the market was projecting. Thus, prices accumulated an increase of 2.5% so far this year, while, if compared to the previous year, inflation reached 4.1%.
There are some elements that caught our attention this time, such as the higher percentage of products that rose in price versus previous months (and versus other mayos), in a context of steadily decreasing inflationary pressures, thanks to the Central Bank's decisive action and the counter-cyclical monetary policy implemented after the 2022-2023 inflation cycle. In any case, we do not believe that inflation convergence we do not believe that inflationary convergence is in jeopardy. Well, at least not for these reasons.
We mention this because, from the supply side, considerable risks emerge, considerable risks emerge from the supply side.
When we think of the social outburst, we all think of the slogan "it's not 30 pesos, it's 30 years", referring to the increase in the price of public transportation that triggered the social protest. However, few remember that, during the same month, an increase of close to 9% in electricity rates was announced, which actually materialized. Considering the convulsed social situation, because to say that they were burning the country may sound very strong, the government reversed the increase, returning them to their initial level and agreeing with the electricity companies on a plan not to increase present prices in exchange for not reducing future prices immediately when it was appropriate to apply the contracts tendered at lower rates. This plan had a financial cost for the distributors, but the negotiations were successful.
This plan was renegotiated again to avoid a significant increase in tariffs during 2022, the already tremendously inflationary situation the country was facing. In this opportunity, not only the pending increases had to be faced, but also the additional increases that would emanate after important changes in the parameters that determine the tariffs, such as the exchange rate.
But there is no deadline that is not met, no debt that is not paid.
Thus, it was time to implement the pending increases, time has come to apply the pending increases. However, as if this were not enough, it is in addition to other increases coming from other components that make up the electricity bills. Thus, according to estimates electricity rates will increase in July and October of this year, in addition to January 2025, accumulating an increase that would be close to 70%. Yes, you read that right: 70%. Thus, only due to the direct impact of electricity bills on the CPI, during July it would have an impact of 0.4 pp; in October 0.7 pp and in January another 0.4 pp. If the estimates of these increases are correct, according to our inflation projections, the CPI would then close 2024 with an increase of 0.4 pp, the CPI would then close 2024 at 5.0% and not at the 3.8% of our central scenario.
However, we have to take this with caution. This is an election year and we know that the population will not be very happy to know that electricity rates are going to increase by 70%. Therefore, it is not it is not out of the question that some additional mechanism to avoid such significant increases will be applied, Some program similar to the original one cannot be ruled out in order not to put pressure on the already battered public finances. But it is difficult to think that some of these increases will not also be passed on to the public, probably the question is simply how much.
