Fynsa
The INE released the CPI for March, which showed a 1.9% month-over-month increase—well above expectations and market prices. Although our estimate was at the high end of the range (1.3% month-over-month), larger-than-expected increases in two categories were enough to put us 0.5 percentage points below that figure.
One of those categories was Food, which showed widespread increases across nearly all its subcategories and, as if that weren’t enough, surpassed the previous all-time highs for the month. In fact, this sector’s contribution (0.8 percentage points) is nearly double that of the next-highest sector, Education, which usually tops this ranking in March. We will continue to monitor this trend, as it appears that its relative contribution will remain high in the coming months.
Education was largely in line with our expectations, driven by the high degree of indexation in these prices. It is worth noting that the vast majority of products in this division are measured only in March, which tends to increase the seasonality of the month.
For its part, the Transportation sector, despite not leading the monthly increases (though it continues to do so on a year-over-year basis), provides quite a bit of important information looking ahead to the coming months. First, fuel prices show no signs of letting up and continue to rise at the upper end of what MEPCO allows. This is not expected to change going forward (any adjustments would be directed at household fuels). Second, a certain “normalization” continues to take hold in the automotive market, as prices have tended to stabilize amid a less dynamic market characterized by greater supply and demand that is no longer as strong as in previous months. Finally, as usual, airfare is bringing volatility to the division—this time with a rise that was quite unexpected for this time of year, though it no longer comes as a surprise given the erratic nature of its performance.
In underlying terms, the CPI excluding volatile items rose 1.5% m/m, driven by both the Services component (1.5% m/m) and the Goods component (1.6% m/m). Thus, it shows a year-over-year change of 7.6%. Another concern was the diffusion index, which reached 70%, once again breaking records by becoming the highest on record under the current methodology (since 2009) and surpassing the record set just last January.
Now, the big question: Should the Central Bank backtrack on what was indicated in the IPoM and continue with aggressive increases in the TPM? Let’s look at some background: (i) According to the report, the Central Bank expected a 1.0% m/m change in the CPI for March. In other words, it fell far short. (ii) Its year-end forecast was already quite low (5.6% y/y), and with this data, it becomes much less likely. If that estimate would have required negative changes toward the end of the year, imagine the situation now, and (iii) despite the presence of a very significant volatile component, the non-volatile component has not eased; in fact, the share of services has even increased marginally.
However, when it comes to managing the TPM, what happens with the CPI excluding volatile items is very important. Yes, I just mentioned that it hasn’t eased, but how does this compare to expectations for the IPoM? Well, the truth is that it’s quite a bit better. The estimation error was significantly smaller, since the Central Bank had implicitly expected a 1.2% m/m change. This could indicate that monetary policy could be steered toward the upper end of the corridor, but without rendering it obsolete. At least not for the time being. Thus, we could see a 50–75 bp increase at the next meeting, by which time we’ll already have the April data, allowing for a better analysis of the situation.
