SEIDO High Frequency CPI: Inflation was 5.3% MoM in December

Monthly inflation remained elevated at 5.3% MoM, and annual inflation reached the triple digits. Monthly inflation moderately rose in December, with a headline rate of 5.3% MoM (versus previous 4.9% MoM). Inflation remains at its highest values in decades, coupled with the highest annual inflation since the end of hyperinflation - the record setting value of 100.4% YoY (vs SEIDO's measurement for December 2021), nearly double 2021's 50.9%.

Seasonal items and core inflation accelerated, while regulated prices slowed down. During the last month of the year, core inflation was 5.2% MoM, above the previous 4.8% MoM. Moreover, seasonal prices increased 5.8% MoM (vs previous 4.1% MoM). Lastly, regulated prices grew 5.1% MoM (vs 6.2% MoM). Incidence of core inflation was 3.5pp. in December, with a further 0.8pp due to regulated price increases, and 1pp to seasonal items. In consequence, without regulated price adjustments, inflation would have been in the 4.5% MoM territory.

Our CPI’s statistical carry-over from December to January was of 1.6% (vs 3.3% in the previous month). In addition, end of period (4-weeks) inflation was 3.6% MoM by the end of December, versus 6.2% MoM in the previous month. End-of-period annual inflation was, therefore, 101.3% in 2022.

Inflation dynamics for the first months of 2023 will remain elevated, with heightened uncertainty. After 2022 has had the highest inflation printings since the end of hyperinflation 30 years ago, it will be more pressing than ever for the authorities to lay out a clear path forward for credible disinflationary policies. Although markets have been expecting a more moderate decision after the changes to the economic policy team, the policy actions undertaken so far have been unimpressive, and future actions still remain highly uncertain - especially considering unforeseeable political developments due to the 2023 presidential elections. The FX market has not provided any positive signals for inflation either: chaotic movements in the parallel rates halfway and at the end of the year, coupled with a sluggish rate of depreciation to the official exchange rate, has resulted in a growing FX gap and in paltry reserve accumulation despite a record harvest and near record-high commodity prices.

Unanchored expectations without a consistent economic program will ensure inflation does not decrease in the short term. As seen in professional and consumer surveys, inflation expectations have drastically increased throughout 2022 - expected price increases for 2022 have risen from 55% in January to 99% in November in the Central Bank's REM, and anticipated price increases for 2023 have already exceeded those for the past year at 99.7% in the same survey. Similarly, forecasts for the next year (2024) have risen consistently over the past 12 months, and would still be at a 30 year high even if inflation dropped the necessary 25bp to make them true (75% in November). Unmoored expectations will result in a high inflation rate until a serious effort to gain confidence and credibility is undertaken - so the chaotic and aimless direction of economic policy does not lend credibility to any promise of a future moderation of policy.

Future policy remains uncertain and stabilizing policy changes are likely to be delayed. The elevated fiscal deficit, funded to a large extent through monetization and reduced at a snail's pace, has contributed and will continue contributing to price growth, perhaps to a lesser extent in the future. In addition, the upcoming election might mean an increase in spending by a government with otherwise poor chances of remaining in power, with unclear implications for prices going forward. However, a progressively smaller deficit over multiple years and small increases in interest rates, still below inflation, will not resolve key macroeconomic imbalances and do not constitute a credible stabilization program on their own. A sudden, large depreciation of the official rate would have unpredictable effects on price dynamics, given the nature of expecations. Monetary policy has indeed tightened, but real interest rates have still been highly negative for most of the year, and expected price growth accelerating will only worsen that dynamic, as well as increasing financing costs and generating fiscal issues going forward.

Consequently, the authorities will be unable to stabilize the economy and anchor expectations as long as the future course of policy is not clarified further - and a decrease in the inflation rate without certainty will be unlikely. This becomes less likely with the election in sight, as the ruling party may attempt to shore up support by an expansion of the deficit - with unclear funding sources and, in all likelihood, an accelerating effect on price growth. Until and unless policymakers show genuine commitment to disinflation with a credible and consistent macroeconomic stabilization plan, inflation will remain unpredictably high and volatile.