Itaú BBA - CHILE – Higher October inflation would lead to steady rates

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CHILE – Higher October inflation would lead to steady rates

November 8, 2017

Inflation surprise concentrated in a handful of goods

Inflation in Chile continues to surprise, but in October it was to the upside, partly normalizing the low September print. The monthly surprise (0.6% print vs. 0.3% expected) is once again explained by a handful of volatile goods (14 items) including tourism packages (0.1pp of the surprise) and some food products. The net surprise over the last two months was -0.1pp.As the October print puts inflation closer to the central bank’s baseline scenario – reinforcing the view that the low inflation reading in September was due to specific factors – inflation convergence to the target in the relevant policy horizon remains broadly on track. In this context, rate cuts in the short term are less likely.

Consumer prices increased 0.6% from September to October, above the 0.2% variation recorded one year ago (and the highest since 2014). The principal group driving the price gain in the month was housing services (1.3% and 0.2pp contribution), lifted by electricity and condominium administrative charges, along with the food and non-alcoholic division (0.9% and a 0.2pp contribution to the total). Tourism packages rose 11.1% in the month, lifting the contribution from the cultural and recreation division to 0.1pp. Tradable goods prices increased 0.9% (+0.1% last year), pulled up by electricity prices, tourism packages and red meat. On the other hand, non-tradable prices rose 0.3% from September (in line with one year ago) lifted mainly by housing services. Excluding food and energy, prices increased 0.3% from the previous month (0.2% last year).

The pickup in annual inflation to 1.9% from 1.5% in September is explained by tradable inflation becoming less of a drag. Tradable inflation came in at 0.8% year-over-year, after posting a null variation in the previous month. Rising electricity prices explain part of the uptick, while the drag from fresh fruit and vegetables (-9.6%) and clothing prices (-5.7%) persist. Meanwhile, non-tradable inflation is at 3.3%, broadly stable for the last four months. Once food and energy prices are excluded, inflation came in at 1.9% (1.8% previously), with the services component stable at 3.3%. Our diffusion index, showed a mild increase after being stable since June. Nonetheless, the index is at low levels and shows that price pressures are limited.

Inflation is set to remain below the central bank’s 3% target until early 2019. The lagged effect of the prolonged strong performance of the Chilean peso and inertia will help keep inflation low. Our 2018 inflation forecast is for a pickup to 2.8% and assumes a narrowing of the output gap, some depreciation of the Chilean peso and the gradual normalization of fresh food prices.


Miguel Ricaurte

Vittorio Peretti

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