Itaú BBA - CHILE – Large upside inflation surprise in October

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CHILE – Large upside inflation surprise in October

November 6, 2020

Inflation will likely end the year close to the central bank’s 3% target

Consumer prices in the month of October increased more than anticipated. Prices gained 0.7% from September, 0.1pp below last year’s variation but well above both the market expectation and our call of 0.3%. Annual headline inflation ticked down from 3.1% to 3.0%. The surprise was widespread, including apparel, food, household equipment and maintenance fees, along with recreation prices as the economy reopening consolidated. As a result, even after excluding volatile food and energy prices, core prices gained 0.7% from September, 0.1pp higher than last year, keeping the annual variation at a still low 2.4% (2.2% previously). The influx of liquidity (through transfers and pension withdrawals), supply strains, and the reactivation of services as the economy reopens are driving consumer prices up. Nevertheless, the significant labor market slack will likely keep inflation from significantly exceeding the 3% target.

In the month of October, the key divisions driving price gains from September were apparel (3.6% MoM, 12bp contribution) and diverse goods and services (2.3% MoM and 12bps, led by financial expenditure on the return of stamp taxes). Meanwhile, food and non-alcoholic beverages posted a monthly variation of 0.6%, and also a 12bp contribution. Energy prices gained 0.5% from September, the second consecutive monthly rise since January. Core inflation – prices excluding food and energy – rose 0.7% from September (0.8% last year), driven by the tradable component (+0.8% MoM vs. 1.2% last year). Meanwhile, services rose a milder 0.5% MoM.

Core annual inflation is gradually edging towards the target, while service inflation remains low, consistent with a wide output gap. The annual drag from gasoline prices increased in October, while milder food inflation supported tradable inflation ticking down 0.3pp to 3.9%. Energy inflation fell 1.3pp to -4.4%, while food inflation dipped 0.3pp to 8.0%. Excluding food and energy prices, inflation edged up 0.2pp to 2.4% (2.6% average during the past decade). Non-tradable inflation remains at a low level of 1.9% (1.7% in September; 4.1% average in the last decade).

Two consecutive upside surprises consolidate the view that the impact of the transitory liquidity injections to the economy will result in headline inflation likely ending the year close to the central bank’s 3% target. The growing likelihood of a second pension withdrawal in coming months would sustain the transitory pressure at the start of next year. Yet, the transitory nature of the increase is unlikely to change the central bank’s stance of stable rates at 0.5%.

Miguel Ricaurte
Vittorio Peretti 

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