Peru | Core inflation refuses to drop, limiting room for rate cuts

Summary

June inflation was 0.12% MoM. The result for the month is explained by the increase in the prices of foods such as fish and potatoes, moderated by the decrease in the prices of chicken, some fruits, and fuel. The year-on-year rate was 2.3% (2.0% in May) within the Central Bank's target range.

Key points

• Key points:
• The component of the consumption basket that excludes food and energy, a trend measure of the pace at which prices advance, increased 0.16% MoM in June and 3.1% in year-on-year terms (remaining above the upper limit of the Central Bank's target range).
• We estimate that inflation will maintain a downward trend until the third quarter of the year in an environment where: (i) inflation expectations are already within the target range, and (ii) the economy is recovering, but without demand pressures on prices. However, the base effect that has been contributing to the reduction in year-on-year inflation will reverse slightly in the fourth quarter, pushing inflation slightly above 2.5% at the end of the year.
• The absence of inflationary pressures, together with the still incipient recovery of economic activity and the restrictive monetary position, suggests that there will be additional cuts in the monetary policy rate in the coming months. In our base scenario we predict that the policy rate, currently at 5.75%, will end the year around 5.0%.
• However, with the local currency registering depreciation pressures in recent weeks and core inflation (which excludes food and energy) refusing to drop, the probability that the pause in the monetary normalization cycle will be extended for this month is not low.

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