As has been the trend of the last few quarters, its evolution has been closely related to the exchange rate (figure 1). The surprise in headline inflation came mainly from foodstuffs (particularly fresh fruits and vegetables), whose prices showed atypical behavior for the season, very different from historical patterns. As a reference, between August and October these prices —which represent 2.9% of the CPI basket— averaged an annual variation of around -9%, which compares with roughly +7% in the last ten years. The baseline scenario assumes that headline inflation will remain around 2% during the first half of 2018, and will return to 3% during the first half of 2019, somewhat later than we expected in September. Core inflation will also remain low in the coming quarters, to converge to 3% in the second part of 2019, somewhat later than headline inflation (figure 2). The projected behavior of prices in the medium term is mainly based on a gradual closing of the activity gap, a process that is expected to begin during the second half of 2018. On this point, neither the recent data nor the projections of the baseline scenario have changed much from September. In the third quarter, non-mining activity—used to estimate the gap—continued to show limited annual growth (which reached 1.7%), below the potential of the economy (which we continue to estimate around 2.5%) and aggregate GDP (2.2%).
Going forward, it is assumed that fiscal spending will follow a path of consolidation. On the expenditure side, as I just said, some salient characteristics of recent quarters have been improved consumption and weaker investment, which have led to revisions to our baseline forecasts. In private consumption, the better numbers so far, especially the dynamism of durable consumption, translate into higher figures for this year and next. On the investment side, there is a clear difference between the behavior of the machinery and equipment and the construction and works components. The former, with a more favorable evolution, has responded to the necessary inventory replenishment after several years stagnant, and has benefited from the exchange rate appreciation and low credit costs. The latter has continued to contract beyond expectations, primarily because of reduced spending on building and engineering works, amplifying the drop in gross fixed capital formation (GFCF) estimated in September for this year. In addition, we estimate that this expenditure component will take somewhat longer to recover. Towards 2018, it is still assumed that the adjustment cycle of mining investment will come to an end and that it will very gradually begin to reflect the effects of the copper price rise. Meanwhile, non-mining investment is slightly revised down, mainly reflecting that the downsloping trend of housing investment has been longer than we thought before. With this, as a percentage of GDP, in 2018 the GFCF will reach 21.1% and 21.4% in real and nominal terms, respectively, compared with averages of 23% to 24% in 2013-2017.