Let me now present in more detail the macroeconomic scenario we believe to be the most likely in the quarters to come and its associated risks. Macroeconomic scenario In July, annual inflation returned to the tolerance range. As I said, the behavior of the exchange rate has played a key role in this process, as it allowed us to leave behind the upward effects of the sharp depreciation the peso experienced in 2013–2015. Considering the average of the ten days prior to the statistical cutoff, the dollar was trading at somewhat less than 670 pesos, equivalent to a nominal appreciation of the peso of around 4% with respect to the close of the previous Report (figure 1). The evolution of the exchange rate has had visible effects on the goods component of core inflation (i.e., the CPIEFE, or CPI excluding foods and energy). In annual terms, it went from around 5% early the year, to 3.7% in its latest measurement. Inflation of the services component of the CPIEFE has made a smoother adjustment, from 5% to 4.5% annually in the same time span, reflecting its indexation to past inflation and output gaps that have not widened much. Accordingly, and as expected, the total CPIEFE has seen a reduction in its annual expansion rate. The more volatile items in the basket showed dissimilar movements in the past three months: while annual food inflation rose, energy inflation fell (figure 2).
Our output and demand outlook is fairly unchanged. There are still risks in our external scenario, even if its recent evolution surprised us for the better. Allow me some final reflections. Final reflections I will end with some thoughts on the capacity of monetary and fiscal policy to address the economic cycle. I think we must because, after years of slow growth and within a context of increasing social demands, pressures on both have become stronger and the way we decide to confront them will be crucial in the future of our economy and our country. I see three main challenges: First, it is obvious that neither monetary nor fiscal policy can flatten out the business cycle, much less affect the economy’s trend growth. But they certainly can smooth the cycle and help the economy make sound adjustments when suffering a domestic or external shock. Anyway, the capacity to smooth the cycle is proportional to the medium-term sustainability of these policies. Why? It is very simple: economic decisions —think of investment, for example— depend not only on such policies’ immediate effects, but also on how the various economic agents expect them to continue to affect the economy in the future. Thus, even if we believe that the effects of some policy action can be very powerful, if the agents consider that implementing that policy will be inconsistent with the macroeconomic equilibria, its effects will be diminished and may even be counterproductive.