Fynsa
October's CPI -just released- was a surprise, showing a 1.0% variation with respect to the previous month. Expectations were around 0.6% m/m, while we at Fynsa were projecting a slightly higher variation, at 0.7% m/m. Thus, the 12-month variation reached 4.7%, while we accumulated during 2024 a price increase of 4.5%.
However, we believe that the surprise of the data does not cause alarm bells to ring, nor that it would change the downward trajectory that inflation has been showing for some time now. It is true that the significant increase in electricity tariffs has delayed this process, but we are opposed to thinking that it has diverted it completely.
Therefore, it is necessary to identify what was behind the variation. The star of the month was, for the second time, electricity rates, which showed a rise of almost 19%, causing the division in which they are located - Housing - to have an impact of more than half a point. To this was added Food, particularly fruits and vegetables, which experienced important increases after certain drops in September. As a curious fact, within the same division, there was an element that had a significant impact, which is unprecedented because it has a small relative weight and because, in general, it does not vary much (in fact, it is located within the non-volatile ones): non-alcoholic beverages showed the largest monthly increase in the comparable history of the CPI (since 2009).
When we look at the underlying indicators, we see that the CPI without volatility increased only 0.4% m/m, which is still an important variation, but it was much lower than that of the general index. Moreover, its services component again showed an increase of 0.2% m/m, continuing the trend of recent months, reflecting the stagnation or very low growth experienced by the local economy.
This, together with other indicators, such as the diffusion index (48% vs. 52% average for the period), allows us to conclude that we do not see a generalized price rebound, nor a generation of inflationary pressures, let alone significant second round effects. This does not mean that they may not occur eventually, or that they are manifesting themselves in some lines, but their magnitude within the total price variation -so far- remains relatively limited. On this same point, it is important not to confuse second round effects with methodological effects that cause lags or somewhat late increases, as in the case of the common expenditure product.
Because of the above, to which we add more qualitative information that we gathered from the Business Perceptions Report, recently published by the Central Bank, we believe that price variations will return to their normalization path. Unfortunately, we have an additional electricity tariff increase next January, which would leave the base higher through 2025. Thus, the year-on-year variations of the general index would continue to fail to converge to 3.0% during next year, a situation that would be quickly rectified starting in 2026.
With the above, the Central Bank should not slow down its pace of cuts, nor could it justify a pause, since the economy has been evolving in line with what was stated in the last Monetary Policy Report, both in activity and prices. This same report indicates that the 25 basis point cuts would continue, with the most immediate one to be made at the next meeting in December. If so, three cuts would be needed to reach what we believe is the neutral rate, therefore, there would be ample degrees of freedom to be able to make these cuts in their entirety, even during the first half of the year..
