The CPI for January rose 0.71% month-over-month, slightly above our expectations (0.6% m/m) and those of the market (0.5% m/m). The year-over-year change reached 3.1%. Notable increases were seen in food, transportation, housing, and basic services. Most of the changes were in line with our estimates at the divisional level, showing that food price increases continue to have a significant impact. These account for half of the year-over-year inflation. Logistical and weather-related factors appear to be driving this trend, which is unlikely to subside in the short term. 

In the transportation sector, the rise in fuel prices stands out, driven by increases in international prices; however, prices for new and used cars also saw significant increases. This reflects inventory issues, as well as the passing on of higher dollar-denominated vehicle costs due to supply chain disruptions, compounded by rising freight rates.

Meanwhile, core indices continue to show that much of the inflation is driven by temporary factors. The problem is that many temporary factors can become a permanent issue, especially in the current economic climate. This does not mean that we are seeing second-round effects or that we believe the Central Bank will accelerate the process of monetary normalization, but certain red flags are being raised. The CPI excluding volatile items rose by 0.6% m/m, nearly as high as the total CPI (0.5% m/m for the CPI-SAE), reaching 3.6% y/y. The most significant aspect of this is that it is primarily driven by the goods component, which grew by 0.9% m/m, reaching a surprising 5.3% y/y. Since July of last year, this indicator has accumulated a 3.6 percentage point increase. Meanwhile, the services component rose 0.3% m/m, reaching 2.3% y/y, and accumulating 1.1 percentage points over 7 months. It is difficult to assess this in the context of a pandemic, but the Central Bank’s Business Perceptions Report notes that the number of business owners and managers who see room to pass on their cost increases to consumers is roughly equal to those who do not, a situation very different from what was observed just a couple of months ago.

Unfortunately, based on the information available to us so far, we do not believe this situation will return to normal anytime soon. We forecast a 0.5% m/m increase for February, driven once again by rises in the Transportation, Food, and Housing sectors (see attached table). This will bring year-over-year inflation to 3.2%, and the Central Bank will face the March IPoM (and its next meeting) with that figure. We also know that, given the base of comparison, it is by no means out of the question that the CPI will show a variation slightly above 4.0% starting in the second half of the year, which could make some people nervous. While this should moderate toward the end of the year, it is one thing to convince the market that you will keep rates low with a 2.5% CPI and quite another to do so with a 4.0% rate. Thus, 2021 would close with 3.5% inflation. Since inflation remains supply-driven, we do not believe the Central Bank will rush its normalization process, provided there is no unanchoring or second-round effects. We will remain vigilant.