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JPMorgan Revise Year-End Inflation to 5.7% oya With Risks To Upside

COLOMBIA
  • Risks to December CPI (out January 5) could push inflation closer to the 6% mark at year-end. Food and energy prices, the two main culprits behind Colombia's inflation spike this year, likely accelerated again in December, based on JPMorgan estimates.
  • Regarding energy prices, the government announced a 2% increase in fuel prices for the month. In addition, JPM are tracking pressure on electricity prices in part due to higher demand which is being met with supply from higher cost sources (like coal). Energy prices would close the year at 9.7%, its highest level since 2016 in the wake of a historically strong El Niño.
  • Their food model, based on the daily SIPSA survey, indicates a chunky 4%m/m gain for this month. Prices at restaurants (comprising 9% of the total CPI basket), which already respond to seasonal factors at this time of year, are also rising as higher input prices are passed through to the customer, according to press reports.
  • Together, these factors add significant upside risk to our prevailing forecast for year-end inflation of 5.3% (0.45%m/m). If fully expressed, food and energy would add about 60bp of upside risk. We are going to assume a lower impact at 0.80%m/m (due to uncertainty on the food price move), taking year-end inflation to 5.7%.
  • JPM believe a lively debate awaits the BanRep board at its next meeting if they are correct. Their call remains for the hiking cycle to continue to reach 5.50% by October. However, with activity recovering strongly, they think the now more-pressing risks to inflation expectations alongside latent financial stability risks will guide the authorities’ reaction function. Indeed, any manifestation of these risks, with food price pressure and indexation dynamics after the minimum wage hike both lurking, and election volatility also on the horizon, could lead to an even more aggressive tightening cycle.
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