Itaú BBA - CHILE – Inflation below expectations in February

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CHILE – Inflation below expectations in February

March 8, 2019

We have revised our yearend call for inflation to 2.6%.

The second data point utilizing the 2018 CPI basket came in below expectations, reaffirming low inflationary pressure and supporting caution at the central bank. Consumer prices were flat from January to February (+0.1% one year ago), inferior to the Bloomberg market consensus of 0.1% (also our call). As a result, annual variation ticked down 0.1pp to 1.7%, further below the central bank’s 2%-4% range around the 3% target. The drop was led by tradable inflation on the back of lower fuel prices, while non-tradable inflation edged up from 2.9% to the 3% target. Overall, inflationary pressures are subdued and in line with a slower than expected convergence to the central bank’s target, hence, stable rates for the time being is likely.

Gasoline, air travel and seasonal fruit were some of the products that pulled prices down in the month. The main divisions that explained the surprise to us were the Food and Non-Alcoholic Beverages, Education and Restaurants and Hotels. The Food and Non-Alcoholic Beverage division led the downward pressure of consumer prices (-0.3% MoM; -0.05pp contribution) as fruits dropped 4.3% (-0.04pp). The transport division fell 0.3% MoM (-0.04pp) as air travel prices fell 5.1% (-0.03pp) and gasoline dropped 3.0% (-0.08pp). Partly offsetting the decline were the annual readjustment rental contracts (0.9% MoM; +0.05pp contribution) and interurban transportation amid the peak vacation period (11.2% MoM; 0.06pp). The 2.5% increase in the apparel division amid the seasonal change and the 0.6% variation of health services were the key divisions lifting prices in the month. Tradable inflation was -0.1% (0% one year ago), while non-tradable inflation of 0.3% was 0.1pp higher than in February 2018. Core inflation (excluding food and energy prices) rose 0.3% from January (0.2% a year earlier).

Energy inflation became a larger drag, but the core measure edged up. Energy inflation dropped to 0.8% in February, far below the 2.6% in the previous month resulting in tradable inflation falling to 0.6% (from 0.8%). Hence, excluding volatile food and energy prices, inflation ticked up 0.1pp to 2.0%. Meanwhile, measures more sensitive to the output gap development showed mild increases with non-tradable inflation moving to 3.0% (2.9% in January) and service inflation now at 2.8% (2.7% previously). However, our diffusion index (relative to the 3% target) is near historically low levels.

Inflation will likely remain low this year. Although we see some pickup as the year unfolds (due to normalization of tradable inflation, and rising output-gap sensitive measures), the results of the methodological changes have led us to revise our yearend call to 2.6% (3.0% previously). Leading up to this data point, the message from the central bank, particularly governor Mario Marcel, has been that short-term inflation expectations have dropped following the introduction of the new methodology last month, but the 3% medium-term outlook remains broadly unchanged. Hence, we expect the upcoming Inflation Report by the central bank to emphasize that the probability of rate moves in the short-term is low.
 

Miguel Ricaurte
Vittorio Peretti



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