Indianapolis - Circa February 2017: JPMorgan Chase Operations Center. JPMorgan Chase and Co. is the largest bank in the United States II

 Argentina: la inflación subyacente de abril no puede romper su inercia

Aumentamos nuestra previsión del IPC de mayo a 2.4% m / m en el traspaso de divisas. Este es informe completo:
 The headline National CPI came in at 2.7%m/m in April (25.5%oya), above our expectations (2.4%m/m)
  • Core CPI decelerated to 2.1%m/m, but has proved unable to break the inertia in place since Dec-17
  • Going forward, regulated price pressures are expected to ease, but FX pass-through is expected to place upward pressure to the inflation outlook through the remainder of the year
  • For May, FX pass-through is expected to add 50bp to headline inflation, and we now forecast prices to increase 2.4% on the month

The headline National CPI came in at 2.7%m/m in April (25.5%oya), 30bps above our expectations (2.4%m/m). The headline print accelerated from the 2.3%m/m print reported in March, with cumulative inflation logging at 9.6% YTD (64% of BCRA’s 15% annual inflation target).

Core inflation proved unable to break the upward inertia evidenced since Dec-17. Indeed, core CPI printed at 2.1%m/m (J.P.M forecast: 2.0%m/m), a deceleration from March’s 2.6%m/m print. Still, on a 3-month average basis, core inflation is running at 2.3%m/m (31.7%ar), accelerating from the 2.1%m/m (28.4%ar) the prior month and well above November’s 3-month average trough at 1.4%m/m (Figure 2).

Breaking down the National CPI by component, regulated prices jointly added 1.4%-pt to the headline print (vs. our 1.2%-pt expectation), which comes on the back of gas, fuels and public transportation tariff adjustments during the month. Indeed, housing and basic services topped the charts, posting an 8.0%m/m increase, followed by transportation and clothing (each up by 4.0%m/m). Meanwhile, food prices were up by 1.2% m/m, decelerating strongly from the 2.2%m/m, 3mma, which is mainly explained by the normalization in food prices following a supply shock in 1Q18 on the back of the drought.

Table 1: National CPI breakdown
Mar-18 Apr-18 YTD
Weight (%) %m/m %-pt cont. %m/m %-pt cont. %YTD variation %-pt cont.
National Headline CPI 100.0 2.3 2.3 2.7 2.7 9.6 9.6
Food and non-alcoholic beverages 26.9 2.3 0.6 1.2 0.3 8.0 2.1
Alcohol and tobacco 3.5 0.7 0.0 1.3 0.0 6.1 0.2
Clothing and footwear 9.9 4.4 0.4 4.0 0.4 7.1 0.6
Housing and basic services 9.5 0.6 0.1 8.0 0.9 13.9 1.6
Furnishings and household equipment 6.4 4.5 0.3 1.2 0.1 8.8 0.5
Health 8.0 1.3 0.1 1.8 0.1 7.4 0.6
Transportation 11.0 1.8 0.2 4.0 0.4 13.0 1.4
Communications 2.8 2.7 0.1 1.0 0.0 15.4 0.5
Recreation and culture 7.3 1.2 0.1 1.9 0.1 7.8 0.5
Education 2.3 13.8 0.3 0.8 0.0 17.7 0.4
Restaurants and hotels 8.9 1.8 0.1 2.3 0.2 9.4 0.8
Other 3.5 1.9 0.1 1.7 0.1 7.9 0.3
Seasonal 1.6 0.2 0.9 0.1 4.5 0.5
Core 2.6 1.7 2.1 1.4 8.6 5.6
Regulated 2.0 0.5 5.3 1.2 15.0 3.4
Source: INDEC and J.P.Morgan

Watch for FX pass-through pressures through the remainder of the year

While the bulk of regulated price adjustments have been left behind (see Table 2), we expect the recent ARS depreciation (13% month-to-date) to place upward pressure on CPI through the remainder of the year. For Argentina, we calculate FX-passthrough in the 20%-40% range, depending on the shock and real rates. We assume pass-through at the bottom of the range, given that the BCRA has already tightened monetary conditions considerably. Thus, we flag a 300-400bps upside risk to our current annual CPI forecast of 22.2%oya, but we wait for market conditions to stabilize in order to reassess our base case scenario for FX, inflation and activity.

Based on recent experiences, we assume that around 20% of the FX pass-through pressures are frontloaded, and thus, we adjust May CPI forecast to 2.4%m/m, as compared to our 1.9%m/m forecast, previously. Indeed, high frequency indicators already point to May CPI above the 2%m/m level.

For June, we still see headline inflation unable to break the 2% monthly level, as the bulk of FX pass-through pressures usually materialize with a 2-3 months lag. Moreover, we estimate that half of the indirect impact of regulated price increases into core prices come with a one month lag, and as such we could still see upward pressures in May stemming from April regulated price increases.

Also, while the government has agreed with oil companies to postpone fuel price increases in May, we could still see further fuel price increases transpiring in June/July. In all, the outlook is for sticky inflation around 2%m/m in the next quarter, which suggests high real-ex ante rates to hold for longer.

Importantly, we now wait for the release of wholesale prices tomorrow to gauge the risks around our May CPI forecast, as well as the high frequency inflation data for the remainder of the month.

Table 2: Tentative tariff adjustments
Weights May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18
Fuels 3.09%  ?? ?? ?? ?? ??
Electricity 1.92% 20%
Gas 2.39% 20%
Water 0.85% 26%
Public transportation 2.70% 11% 1%
CPI Impact 0.2% 0.3% 0.0% 0.0% 0.4% 0.5%
Source: EcoGo and J.P. Morgan.