A rebound in transportation costs has helped give Costa Rican prices some backbone, although food and drink prices remain very weak, and the May data showed no price growth.
IHS perspective | |
Significance | Costa Rica's consumer price index rate stands at -0.4% year on year (y/y) through the May data, continuing the streak of deflationary y/y rates. |
Implications | Interest rates will be very low for the short term, given the continuation of weakness in aggregate prices. Private consumption will continue to receive support as a result of weakness in prices of goods and services. |
Outlook | IHS expects that deflationary pressures will relent by the late third quarter or early fourth quarter, as we see some signs of underlying price recovery starting to emerge. For year-end 2016, inflation will be very subdued at 2.6% y/y. |
CPI summary
The most recent data release indicates that some price recovery is happening, with the headline figure moving forward slightly, while influential components are seeing a degree of softness removed. Specifically, transportation costs made a healthy advance, and those costs represent a significant portion of the overall consumer price index (CPI) basket of goods and services. Transportation-related goods and services are a large component in the CPI, approximately 15% of the total, and therefore any significant price adjustments in this category can create major shifts in the headline CPI figure. Furthermore, transportation-related costs influence many other areas of the CPI, given the spillover effect of how transportation costs can affect the prices of goods that must be moved from one place to another.
Costa Rica inflation (% change) | |||||||
| M/M | Y/Y | |||||
| May 16 | Apr 16 | 2014 | 2015 | Year to date | Apr 16 | May 16 |
CPI inflation, total | 0.1 | -0.2 | 4.5 | 0.8 | 0.8 | -0.9 | -0.4 |
Food and non-alcoholic drinks | -0.1 | -0.3 | 4.3 | 3.2 | 3.3 | -1.6 | -0.1 |
Transport | 0.9 | -1.5 | 4.0 | -5.5 | -5.4 | -5.7 | -4.7 |
Rent and housing | 0.3 | -0.4 | 2.9 | -2.1 | -2.0 | -0.7 | -0.8 |
Health | 0.5 | -0.2 | 5.3 | 5.1 | 5.2 | 2.0 | 2.3 |
Education | 0.6 | 0.4 | 6.6 | 5.6 | 5.6 | 4.2 | 4.5 |
Entertainment and recreation | 0.6 | 0.3 | 4.5 | 0.6 | 0.6 | -0.7 | 0.0 |
Food outside home | 0.1 | 0.0 | 4.2 | 2.9 | 2.9 | 1.8 | 1.9 |
Other goods and services | -0.5 | -0.1 | 4.5 | 3.4 | 3.4 | -0.1 | -0.3 |
Source: Central Bank of Costa Rica | |||||||
In recent days the Costa Rican colón has been on a sharp upward trend, although it continues to fluctuate in relatively tight bands, and therefore is broadly stable, precisely in line with IHS's baseline expectations. The value of the colón is not a major risk in our inflation outlook, as we continue to believe it will be broadly stable and responsibly managed through the short term. Officially the colón is a floating currency, but the central bank has openly stated that it will manage any extreme fluctuations with intervention in the currency exchange market. Effectively, the Costa Rican colón is closely managed. Although currency depreciation would be an overall positive for Costa Rica, both for inflation and export competitiveness, we do not expect such a development in our baseline scenario. As the below graph clearly illustrates, the exchange rate has been extremely reliable and will not be expected to deviate significantly from this regime in the coming months.
Outlook and implications
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For the remainder of 2016 we do not forecast any major spikes in inflationary pressures, although we do expect prices to rebound from the current negative territory. Specifically, we believe that prices will firm in the late third or fourth quarters, as we are beginning to see signs of underlying recovery in the most important categories of the CPI. The overall economic outlook for Costa Rica will be for moderate growth in 2016, but the slightly weaker growth expectations in the US economy will put downward pressure on the important tourism service sector. Regarding domestic Costa Rican dynamics affecting GDP growth, we expect a stabilising fixed investment rate, mildly recovering export sector, and a healthy consumer spending result. Consumer spending will receive support from the weak prices, although the bulk of the positive consumption shock has been felt in previous quarters. Still, the weak prices will act as a stabiliser for consumer spending, rather than a boost to accelerated growth rates. The private consumption outlook will be the brightest point for the Costa Rican economy; overall, it represents 65% of total GDP, and in 2016 we expect year-end growth near 4.0% in the consumer spending category. The tourism industry will be expected to perform moderately, though our outlook is for weaker results as a result of slower US growth. In any case, the hotels and restaurants sub category will contribute substantially to the headline GDP growth rate. We expect agricultural output to continue at weak rates, and production will continue to be highly exposed to adverse weather conditions caused by El Niño. As a whole, the Costa Rican economy will experience another year of unimpressive growth; year-end 2016 will bring GDP growth near 3.4%. We believe that weak prices will begin to firm, with positive year-on-year (y/y) price growth by approximately July 2016; inflation will begin to creep upward through year-end 2016, although y/y rates will remain well within the central bank's target range. For CPI inflation, we expect the 2016 year-end figure to be near 2.6%. The policy rate is likely to remain at the extremely low level of 1.75% in response to the very weak price levels.