January CPI increased 0.71% m/m, slightly above our expectations (0.6% m/m) and those of the market (0.5% m/m). The year-on-year variation reached 3.1%. Food, transportation, and housing and basic services rose the most. Most of the variations were in line with what we estimated at the division level, showing that food increases continue to play an important role. Half of the year-on-year inflation is explained by these. Logistical and climatic factors would be behind this phenomenon, which would not necessarily dissipate in the short term. 

In transportation, the rise in fuel prices is noteworthy, due to international price increases, but also the prices of new and used cars experienced significant increases. This reflects stock problems, but also a pass-through of higher vehicle costs in dollars due to problems in the supply chains, in addition to the increase in freight rates.

On the other hand, the underlying indices continue to reflect that a large part of inflation is explained by transitory factors. The problem is that many transitory factors can become a permanent problem, especially at a juncture like the current one. This does not mean that we see second-round effects or that we believe the Central Bank will bring forward the process of monetary normalization, but certain alerts are being raised. The CPI without volatility experienced a variation of 0.6% m/m, almost as high as the total CPI (0.5% m/m the IPCSAE), reaching 3.6% YoY. The most relevant aspect of this is that it is mainly explained by the goods component, which grew 0.9% m/m, reaching an astonishing 5.3% YoY. Since July of last year, this indicator has accumulated a 3.6 pp increase. On the other hand, the services component increased 0.3% m/m, reaching 2.3% y/y, and accumulating 1.1 pp in 7 months. It is difficult to evaluate this in a context of pandemic, but the Business Perceptions Report of the Central Bank mentions that those businessmen and managers who see room to pass on their cost increases to consumers would be relatively even with respect to those who do not see room, a situation very different from what was seen only a couple of months ago.

Unfortunately, with the information we have so far, we do not believe that this situation will normalize quickly. We forecast for February a rise of 0.5% m/m, again influenced by increases in the Transport, Food and Housing division (see attached table). This will bring year-on-year inflation to 3.2% and with this data the Central Bank will face the March IPoM (and its next meeting). We also know that due to the basis of comparison, it is not at all out of the question that the CPI will show a variation slightly above 4.0% at the beginning of the second half of the year, which could make some people nervous. Although this should moderate towards the end of the year, it is different to convince the market that you will have a low rate with a 2.5% CPI than the same but with 4.0%. Thus, 2021 would close with 3.5% inflation. As the sources are still supply-side, we do not believe that the Central Bank will hurry its normalization process, as long as there is no de-anchoring or second round effects. We will remain vigilant.