Itaú BBA - CHILE – Higher-than-expected October inflation

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CHILE – Higher-than-expected October inflation

November 8, 2019

A widening output gap would likely keep demand-side inflationary pressures contained ahead

Consumer prices rose 0.8% from September to October (0.4% one year earlier), superior to the Bloomberg market consensus of 0.6% and our 0.7% call. A partial implementation of an electricity tariff hike (to be reversed in coming months), seasonal rise to air-travel, some food produce as well as a higher-than-expected spike in tourism packages lifted inflation in the month. As a result, annual inflation ticked up 0.4pp to 2.5%, mainly due to an acceleration of the tradable component, while the Central Bank’s key core services component remained stable and near historical lows of 2.6%. Hence, with domestic demand pressures restrained and the domestic uncertainty likely to affect investment and consumption decision-making going forward, we expect a 50-bp rate cut to 1.25% at the December meeting.

Four products (electricity, tourism packages, air-travel and red meat) of the 303 that compose the consumer price basket contributed around half of the monthly inflation gain. The 4.4% electricity rise came in below the 9.2% stipulated tariff adjustment. Responding to social protests, Congress approved the creation of a stabilization mechanism for electricity prices, while the decree to reverse the September hike and keep electricity prices stable throughout the remainder of this year and 2020 is pending (but expected to pass). Additionally, the food and non-alcoholic beverage division rose 0.8% MoM, tourism packages increased 10.7% MoM, while the transportation division posted a 1.3% monthly gain. Given the protest impact on tourism, it is likely that recreation-related prices become an inflation drag in coming months. Inflation excluding volatile food and energy prices increased 0.6% from September (0.1% last year), as tradable prices increased 1.2% over the month (0.1% last year). Meanwhile, non-tradable prices gained 0.4% (similar to the 0.3% rise in October 2018).

Core service inflation (non-tradable), a measure sensitive to internal demand pressures, remains at 2.6%, a level last seen in 2009. Energy inflation is having a milder drag effect at 1.9% yoy (0.8% drop in September), while food prices ticked up 0.3pp to 2.7%, leading to tradable inflation rising 0.8pp to 2.5% (highest rate in more than a year). After excluding food and energy prices, core tradable inflation ticked up 0.6pp to 2.5%, somewhat milder but likely confirming that some exchange rate pass-through is unfolding. Overall, inflation excluding food and energy prices edged up 0.3pp to 2.6%, below the central bank’s 3% target. Despite the inflation uptick, our diffusion index (variations above and below the 3% target) still points to contained inflation pressures, reflecting that the higher inflation was not widespread.

We expect a widening output gap would likely keep demand-side inflationary pressures contained. Additionally, the announced reversals and price freezes to subway and electricity prices (along with those to toll-roads and water bills etc under consideration) raise the risk that inflation convergence to the target is delayed. Additionally, these effects could be amplified by the possibility that other service and retail providers look to reduce margins rather than directly pass price pressures (mainly from the tradable component) through to consumers. Overall, we expect inflation to end both this year and 2020 at 2.6%.

Miguel Ricaurte
Vittorio Peretti

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