Itaú BBA - CHILE - Big downward CPI surprise, lower yearend inflation expected

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CHILE - Big downward CPI surprise, lower yearend inflation expected

July 7, 2017

We revised our yearend inflation forecast to 2.4%, from 2.8% previously.

Consumer prices came in well below market expectations in the month of June. Inflation dropped below the lower bound of the central bank’s 2%-4% target range to 1.7% (from 2.6% previously) and is the lowest annual inflation since October 2013. This is below the 2.1% Bloomberg market consensus and our 2.0% forecast. The continued decline in tradable inflation, favored by a stable exchange rate, remains the main drag on consumer prices, however, non-tradable inflation also fell substantially, standing at its lowest level since July 2013. The data has led us to revise our yearend inflation forecast to 2.4%, from 2.8% previously.

Prices fell 0.4% from May to June, below the 0.4% gain recorded one year ago.The monthly print was well below the Bloomberg market consensus of 0% and our -0.1% expectation. The surprise was concentrated in a handful of products. The larger than expected reversal of tourism package prices (-15% and contributing 0.14pp to the total monthly fall), alongside the 9.9% drop in air-travel explain over half of the surprise. Given the drop in tourism packages, the recreational goods division was the main drag in the month (-0.16pp), followed by food and non-alcoholic beverages (-0.13pp, led by lemon and tomato prices) as well as apparel (-0.06pp). Tradable goods prices fell 0.7% (+0.5% last year), while non-tradable prices were flat from May (+0.4% one year ago). Excluding food and energy, prices fell 0.4% in the month (+0.3% in June 2016).

Tradable inflation dropped to 0.6% year over year (1.7% previously), pulling headline inflation down. Meanwhile, non-tradable inflation slowed to 3.1%, from 3.6%, supported by lower housing prices. Once food and energy prices are excluded, inflation dropped to 1.8% (from 2.5% previously). Other core inflation measures fell by around 0.5pp to 2.0%. Excluding food and energy, services inflation declined to 3.1% (from 3.6%). Our diffusion index continues to reflect diminishing price pressure, with the declining contribution coming from tradable products, while the non-tradable contribution is stable at low levels.

We do not expect the central bank to act on low inflation just yet, but if activity fails to show signs of a recovery in the second half of the year, the board will likely re-evaluate its stance. We see the policy rate stable at 2.5% this year, but given the recent evolution of inflation and activity, there are risks of further interest rate cuts.


 

Miguel Ricaurte

Vittorio Peretti


 



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