SEIDO High Frequency CPI: Inflation was 6.9% MoM in July

Monthly inflation spiked at 6.9% MoM in July. Inflation remains at its highest value in decades, coupled with the highest annual inflation since the end of hyperinflation. Annual inflation was 116.7% YoY (compared to our measured values for July 2022), continuing the trend of extremely elevated printings.

Core inflation and seasonal items went up while regulated prices slowed down. During the seventh month of the year, core inflation was 7.0% MoM, above the previous 6.5% MoM. Moreover, seasonal prices increased 7.7% MoM (vs previous 1.8% MoM). Lastly, regulated prices grew 5.4% MoM (vs 7.2% MoM). The incidence of core inflation was 4.4pp. in July, with a further 0.8pp due to regulated price increases, and 1.7pp to seasonal items. In consequence, without regulated price adjustments, inflation would have been in the 6.1% MoM territory.

Our CPI’s statistical carry-over from July to August was 2.4% (vs 3.0% in the previous month). In addition, end of period (4-weeks) inflation was 6.7% MoM by the end of July.

Inflation dynamics for 2023 will remain elevated, with increased uncertainty. Given that the first 7 months of the year showed very high price dynamics and no credible policy action has been taken, inflation will likely persist at an elevated pace during 2023. Nevertheless, lower-than-expected inflation in May and June provided a slight easing of inflationary expectations. Surveys of professionals and consumers show that inflation expectations moderated but remain at drastic levels: expected inflation for 2023 is 142.4% YoY, while inflation for 2024 is expected to be 105.0%, according to the Central Bank's REM.

Even though inflation slightly moderated in the last two months, it will not be sustainable over time. Perhaps the most important one is unanchored expectations: agents' are reluctant to believe in a drop in inflation since it is an election year and the government has incentives to boost expansionary policies. Furthermore, as part of the ongoing negotiations with the IMF, a series of new measures have been implemented. Firstly, the exchange rate of agricultural settlements has been raised, leading to an increase in monetary expansion. Secondly, the prices of imported products have been adjusted upwards to bolster international reserves, a move that is expected to exert a significant influence on the overall price levels in the economy. Thus, unless the government shows a firm commitment to implementing a sustainable and credible macroeconomic stabilization plan during the presidential transition, the inflation rate will continue to behave unpredictably and will remain at its current historical highs.