Fynsa
INE released the March CPI, which showed an increase of 1.9% m/m, which was well above expectations and market prices. Despite being at the high end of estimates (1.3% m/m), higher than expected increases in two divisions were enough to leave us 0.5 pp down.
One of these divisions was Food, which showed generalized increases in almost all its classes and, as if that were not enough, surpassed the highest historical records for the month. In fact, the incidence of this division (0.8 pp) was almost double that of the next highest division, Education, which in March is usually the leader in this ranking. This evolution is something we will continue to monitor, as it seems that its relative incidence will remain high in the following months.
Education was fairly in line with what we expected, driven by the high indexation component that these prices have. We recall that the vast majority of products in this division are measured only in March, which tends to increase the seasonality of the month.
On the other hand, Transportation, although it is not leading the monthly increases (although it continues to do so in year-on-year terms), provides important information for the coming months. First of all, fuel prices do not let up and continue to rise at the high end of what the MEPCO allows. This should not change going forward (modifications that would be made would be aimed at intra-domiciliary fuels). Secondly, a certain "normalization" continues to consolidate in the automobile market, since prices have tended to stabilize, together with a less dynamic market, with a greater supply and a demand that is no longer as strong as in previous months. Finally, for a change, air fares brought volatility to the division, this time with a rise that was quite unexpected for the date, but no longer surprising given its erratic behavior.
In underlying terms, the CPI excluding Volatiles increased 1.5% m/m, driven by both the Services (1.5% m/m) and Goods (1.6% m/m) components. Thus, it shows a y/y change of 7.6%. Another thing that concerned us was the diffusion index, which reached 70%, again breaking records by becoming the highest with the current methodology (since 2009), beating the record of last January.
Now, the big question: should the Central Bank backtrack on the IPoM and continue with aggressive TPM increases? Let's look at some background: (i) According to the report, the Central Bank expected a CPI variation of 1.0% m/m in March. In other words, it fell far short. (ii) Its expectation for the end of the year was already quite low (5.6% YoY) and this figure makes it much less likely. If for that estimate we should see negative variations towards the end of the year, imagine now, and (iii) Despite the fact that there is a very important volatile component involved, the non-volatile component has not slackened and even, at the margin, the incidence of services has increased.
However, for the management of the TPM, it matters a lot what happens with the non-volatile CPI. Yes, I just mentioned that it has not loosened, but how is that going with the expectation of the IPoM? Well, actually quite a bit better. The estimation error was quite minor, as the Central implicitly expected a 1.2% m/m change. This could indicate that the conduction of monetary policy could march along the upper part of the corridor, but not render it obsolete. At least not for the time being. Thus, we could see an increase of 50-75 bp at the next meeting, when we would already have the April data, which would allow us to have a better analysis of the situation.
