Inflation in October hits 27-month lows

Inflation not only decreases because the prices of some products are corrected, but because the prices of others do not progress due to slow market dynamics. Thus, in October, the Consumer Price Index (CPI) in Metropolitan Lima recorded a year-on-year decline of 0.32%, rounding out a drop of 2.99% so far this year, according to INEI.

This 12-month inflation of 4.35%, the lowest since July 2021, combines a correction in food prices that rose rapidly in previous months with other sectors, whose price increase has been practically zero, such as communications or education, more linked to demand.

Promptly, The fall in the price of lemons contributed to the looser performance of inflation in the month of study (the second negative result so far this year). It went from costing S/9.06 to S/2.17 in the wholesale market, according to the Price and Supply System (Sisap). Other foods that relieved the home table were red onion (-41.8%) and eggs (-3.2%), with lighter drops for chicken (-0.5%) and meat (-0. 2%).

The cities with the most marked slowdown were Tacna (-0.45%), Cerro de Pasco (0.53%) and Piura (-0.64%), the latter where the commercialization of fuels from the Talara Refinery and where a moderate to strong El Niño phenomenon is expected.

CPI rebounds in December

Economist Juan Carlos Odar, director of Phase Consultores, highlights the magnitude of a fall “much larger than usual”, but rules out that the target range of 3% can be reached in the remainder of 2023, as it would force inflation to progress less than 0% in the last two months of the year.

However, Odar maintains that, at this point, it is not desirable to aspire to such modest inflation in the coming months, since December is a month in which “inflation is typically positive” and reflects greater demand, leveraged by the end of year partys. Above all, because it is an economy in recession.

“An inflation close to 0% or negative in December would be a negative reading, because it would indicate such weak internal demand that prices do not rise, even when seasonally they should,” he says.

Credits should go down

One of the mechanisms that the Central Reserve Bank of Peru has (BCRP) to control inflation is to raise the reference rate, that is, to increase the cost of the money it lends to other banks and these, in turn, increase consumer credit.

Luis Arias, former director of the BCRP, points out that the fall in inflation in October should anticipate a new rate cut, which currently stand at 7.25%. However, the return to the 3% goal, which he sees as appropriate for the first quarter of 2024, would still be subject to climate effects.

“This slowdown creates more room for the BCRP to continue, reducing its interest rates in the coming months, without a doubt,” says Arias Minaya.

In any case, the specialist places the spotlight on the “very weak local demand” that has contributed to this lower inflation in the tenth month of the year, translated not only at the level of private investment (which fell close to double digits) and internal consumption, but rather a contraction of public spending.

The Fed pauses interest rate hikes

The United States Federal Reserve left interest rates unchanged on Wednesday, but noted that future rate hikes are still possible if that’s what is needed to curb persistent inflation.

It was the second consecutive meeting in which North American authorities kept rates stable between 5.25% and 5.5%, after an aggressive series of increases during the previous year and a half.

Inflation in the euro zone also had the lowest reading since July 2021. The price marker fell to 2.9% year-on-year in October, compared to the 4.3% registered in September.

The BCRP reported that it revised inflation upwards in our country for 2023: now it would no longer close the year at 3.3%, but at 3.8%, still above the target range it had set, to which it hopes to return. only in March or April 2024.

Reactions

Luis Arias Minaya, former director of the BCRP

“Everything indicates that inflation will remain downward in the next two months, taking into account that in November and December of last year the market had quite high rates.”

Juan Carlos Odar, director Phase Consultores

“In sectors linked to demand, prices have not risen as much. This is harmful, it tells us that there is no growth in economic activity because there are not enough consumers.”