Fynsa
The INE published the CPI for March, which showed an increase of 1.9% m/m, well above expectations and market prices. Despite being at the high end of estimates (1.3% m/m), larger-than-expected increases in two divisions were enough to leave us 0.5 pp below.
One of these divisions was Food, which showed widespread increases in almost all categories and, as if that were not enough, exceeded the highest historical records for the month. In fact, the impact of this division (0.8 pp) is almost double that of the next division, Education, which is usually the leader in this ranking in March. We will continue to monitor this trend, as it appears that its relative impact will remain high in the coming months.
Education was fairly in line with our expectations, driven by the high indexation component of these prices. We note 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, transportation, despite not leading the monthly increases (although it continues to do so in year-on-year terms), provides quite important information for the coming months. First, fuel prices show no sign of letting up and continue to rise at the upper end of what the MEPCO allows. This is unlikely to change going forward (any changes would be aimed at domestic fuels). Second, a certain "normalization" continues to take hold in the automotive market, as prices have tended to stabilize, hand in hand with a less dynamic market, with greater supply and demand that is no longer as strong as in previous months. Finally, for a change, airfares are bringing volatility to the division, this time with a rather unexpected rise for the date, but one that is no longer surprising given their erratic behavior.
In underlying terms, the CPI excluding volatile items rose 1.5% month-on-month, driven by both the services component (1.5% month-on-month) and the goods component (1.6% month-on-month). This represents a year-on-year change of 7.6%. Another concern was the diffusion index, which reached 70%, once again breaking records by becoming the highest under the current methodology (since 2009), beating last January's record.
Now, the big question: should the Central Bank backtrack on what it indicated in the IPoM and continue with aggressive MPR increases? Let's look at some background information: (i) According to the report, the Central Bank expected a 1.0% m/m variation in the CPI for March. In other words, it fell well short. (ii) Its year-end expectation was already quite low (5.6% y/y), and with this data, it becomes much less likely. If we were to see negative variations toward the end of the year for that estimate, imagine now, and (iii) Despite a very significant volatile component involved, the non-volatile component has not slowed down and, in fact, the incidence of services has increased marginally.
However, for TPM management, what happens with the CPI excluding volatiles is very important. Yes, I just mentioned that it has not slowed down, but how does this compare with the IPoM expectation? Well, the truth is that it is quite a bit better. The estimation error was quite small, as the Central Bank implicitly expected a variation of 1.2% m/m. This could indicate that monetary policy could be moving towards the upper end of the corridor, but without rendering it obsolete. At least not for the moment. Thus, we could see an increase of 50-75 bp at the next meeting, when we will already have the April data, which will allow for a better analysis of the situation.
