Fynsa
There is no doubt that the CPI data for December came as a surprise, and a big one. For most of the month, the market expected a positive variation of 0.1% with respect to November, which was finally reduced to a projection of zero. In our scenario, from the outset we estimated a slight price decline of 0.1%, particularly for the food division. Therefore, it came as a surprise when it was reported that the CPI had fallen 0.5% m/m, which meant that inflation would close 2023 at 3.5% m/m. inflation closed 2023 at 3.9%, even below what the Central Bank had projected only weeks earlier.
Questions immediately arose as to whether this abrupt moderation in prices could be a signal that will provoke a more aggressive response from the monetary authority. The questions that immediately arose were whether this sharp moderation in prices could be a signal that will provoke a more aggressive response from the monetary authority. Although we believe that this is extremely likely, it does not necessarily respond to this particular data, but to a dynamic that has been shown for some time.
First of all, the surprise may read more spectacular than it is, especially because it affects the end-of-period statistic, which also now reads as "three and something" and no longer as "four and a fraction". However, let us not forget that in November we had a completely opposite surprise, with a 0.7% monthly rise that was not in anyone's calculations. Our point is that sometimes figures are sometimes overestimated at the margin, ignoring that the trends behind volatility are much more informative when it comes to making economic policy decisions. In this sense, year-on-year variations have been decreasing for a long time, not only in the aggregate index, but also in the underlying and its components.
Second, activity continues to show stagnation, with some sectors being particularly hard hit by high interest rates. This is well known to the monetary authority, which knows that the question is not whether or not to lower rates, but how aggressively to do so. Therefore, the data in the margin gives more degrees of freedom to the board in case it wants to increase the pace of reduction without surprising the market, but under no prism does it question or give permission for its execution.
FinallyFinally, inflationary expectations in the relevant terms for monetary policy are now below 3%, a signal that has historically allowed for more pronounced adjustments in the TPM. After the 75 bp decrease at the recent meeting, the market took for granted that in January the declines in this amount would continue, which is probably now the minimum range. In our view, there is room today for cuts of 100 bps or even 125 bps if one wanted to show some more concern about this de-anchoring of expectations.
As an interesting fact, the first CPI figure we will know for 2024 is framed in the new basket with base 2023 = 100, which not only incorporates modifications in the products and their composition, but also in some methodologies. Although the reader may find that this should not have much influence on monetary policy, let us not forget that in the previous change in the CPI basket, the new basket was based on a base of 2023 = 100, let us not forget that in the previous basket change there was an important debate on what variations to consider, since the spliced series and those of the previous basket did not coincide in their year-on-year comparison. We have tried to replicate this exercise, reconstructing the CPI from 2019 with the new basket and methodology to anticipate a scenario like the past. Both at the division level and at the product level (the highest possible disaggregation) we have not found differences in the year-on-year variations that could introduce complications in the debate such as those we saw in 2019. However, the final word will come from INE on February 8, when it will publish the spliced series and, hopefully, the rest of the documentation on methodology that is still pending.
