According to INE, the CPI for April registered a monthly variation of 0.5%, a figure that was slightly above our expectation of 0.4% m/m and also above the market average of 0.3% m/m. Thus, so far this year, inflation has accumulated an increase of 2.2%, and in 12 months the figure rose to 4.0% from the 3.7% recorded in March. When considering the benchmark series, inflation rose to 3.5% from 3.2% in the previous month.

In the last month, the largest increases came from the Food and Transportation divisions, and although the fall in the Apparel and Footwear and, although the fall in the Apparel and footwear division partially offset these increases, we see that the volatile component of the basket is once again taking center stage.

However, when reviewing the underlying indicators, we find more reassuring data. The CPI Non-Volatile CPI increased 0.5% in the month, but in annual terms declined from 3.7% to 3.5%. The Non-Volatile Services component increased 0.4% m/m, which in 12 months retreated from 5.7% to 5.4%. It was Goods that registered a higher variation with 0.7% m/m, which led it to increase slightly from 1.0% to 1.1% y/y between March and April.

On the other hand, the diffusion rate reached 50.8%, the lowest of the year, below the April average, although somewhat above that seen in the years prior to the pandemic.

So, So, it is mainly the more volatile elements that are causing this greater variation than expected in April, This is to be expected considering, on the one hand, the increase in international oil prices, which directly affects fuel prices. But also, on the other hand, there is the exchange rate depreciation of the last months, which undoubtedly has an effect on inflationary dynamics, which is evidenced, in part, by the variations of the goods component in the CPI described above.

In terms of inflation for the coming months, and in particular for the second half of the year, we expect more benign readings. This would be because part of the recent higher inflation is transitory in nature, although there are reasonable doubts as to its duration. But it would also be because of an expectation that the exchange rate should continue to align towards levels more consistent with its fundamentals. This is why we maintain our year-end inflation forecast at just under 4.0%.

From the monetary policy standpoint, we see that with the recent data, not only on inflation but also on activity, the issuing entity has room to continue lowering the rate. Not only has the economy been satisfactorily correcting the macroeconomic imbalances caused by the pandemic, but also inflation readings, excluding the volatile component, are closer to the Central Bank's target.

Given the above, the conditions would be in place for the downward rate adjustment process to continue and, therefore, we do not think that the Central Bank's strategy will change with respect to future rate cuts, even maintaining their speed, We therefore do not think that the Central Bank's strategy will change with respect to future rate cuts, even maintaining their speed. Although, as the year progresses, it should regulate the magnitude of the cuts, as conditions -both locally and externally- justify it.

Milene Rodriguez
Strategy and Investment Analyst