Monday, January 3, 2011
December inflation, at -0.30 percent mom, came in much lower than expected. The food prices were again the main culprit, registering their largest December fall since 2003. Inflation ended the year at 6.4 percent yoy, coming in at even better than the CBT's projections.
I will not do a complete review of the figures. If you are interested in that, you may have a look at the piece published by Citi economists. But I will just make a very small observation, using my well-known maxim that a picture is worth more than a thousand words:
As you can see, headline and core inflation have historically (whatever short history there is to the figures) moved more or less together. However, this recently changed, mainly on the back you know who- our good old friend food inflation. But they are likely to converge in the coming months, and not only because of normalizing food inflation (note that global food price developments pose an upward risk to food inflation, but let's ignore it for the moment), but also because of rising core inflation.
In fact, the uptick in core inflation is the only blemish to an otherwise a pearly-white inflation figure. And it is not just one-time: We should see more of that as temporary factors, including base effects, exchange rate appreciation, and price setting still attuned to the previous phase of the economic cycle, that more than offset the rapidly closing output gap, as the IMF was recently noting, begin to lose effectiveness (note to perennial spammer: another opportunity to strike me, as I am quoting instead of doing high-caliber economic analysis).
In fact, my inflation forecast shared in today's column is based on these factors, rather than nasty surprises on the food inflation front, so God help us if we are torpedoed on that front as well....