The economic agents consulted by the Central Bank of Uruguay (BCU) corrected their inflation expectations upwards, according to the latest Expectations Survey published by the monetary authority, corresponding to May. After the drop in April that placed the projections within the target range, what could be behind this slight rebound?
The Inflation Expectations Survey May revealed that the local market expects annual inflation of 5.50%, thus raising its prospects from the 5.41% they had indicated in April. The difference is not large, but it marks a change in the trend that economic agents have been having with respect to their price evolution forecasts, concentrated mainly on what will happen in the next semester, where they expect a CPI accumulated 2.48%.
The increase also occurs in a generalized context in which a global inflationary rebound is expected during the second half of the year, which, most likely, will have its correlation at the local level. However, Uruguay It also presents factors specific to its situation that may have influenced this correction of market expectations.
Increase in average household income
One of these factors that may have influenced the outlook is the increase in average household incomewhich in the first quarter of the year rose 6.4% year-on-year, reaching a historical maximum and driven by improvements in real wages, employment and, also, inflation.
However, these higher incomes can have an inflationary effect on prices, starting from a higher consumption: on the one hand, because Uruguayans have more pesos in their pockets and, on the other, because they choose to spend them in the local market and not in the Argentine market, as was happening last year.
Although current CPI levels are historically very low—below 4% monthly and eleven months ago within the target range of 3%-6% set by the government—attention should be on those sectors with productivity and supply problems. in which higher levels of income can generate extraordinary price increases. Certainly, economic agents may have had this scenario in mind when responding to the survey. BCU.
Monetary politics
The Central Bank’s monetary policy may also have been an issue considered by agents, especially after it cut the monetary policy in April. Monetary Policy Rate (TPM) —in May he left it unchanged—more as a political signal regarding the exchange delay than as a technical decision on pricing.
In that sense, the economist Jose Licandro had warned in dialogue with Ambit that the measure of BCU It could have undesired effects on inflation expectations—today, the great obstacle for the monetary authority in its objective of continuing to reduce the CPI in a deep and sustained manner—, while it undermined the credibility of the organization.
“Taking monetary policy to an instance that from a technical point of view is no longer even neutral, is expansive, It is a risky measure, on the one hand, because the aggregate demand is going to play against; and, on the other, the agents are watching what you are doing and if no one is still convinced and you start to loosen monetary policyit is risky for expectations,” argued Licandro, at the end of April.
Electoral climate
Finally, the fact that this year is the scene of the presidential election It is not an element that goes unnoticed by the markets, especially when deploying their projections. Even more so if we take into account that the variation in inflation expectations from April to May occurred in the semester that runs from this month until October, when the bulk of the inflation is concentrated. Campaign electoral.
In this regard, economic agents may be beginning to worry more about what will happen in the coming months than about what is happening at the level of price control; particularly in a context in which the elections are even and the lack of autonomy of the BCU It can be a factor of doubts regarding monetary policy.
Source: Ambito
