Itaú BBA - CHILE – Limited inflationary pressures in July

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CHILE – Limited inflationary pressures in July

August 7, 2020

Falling service prices reflective of weak domestic demand

Consumer prices rose 0.1% from June to July (0.2% last year), in line with expectations, leading to a headline inflation drop of 0.1pp to 2.5% YoY as domestic demand remained weak and oil prices low, while upside pressure came principally from food prices. The continued transfer of low global oil prices to the pump, along with social mobility restrictions still mostly in place during the month, meant that the key price drag came from the transportation division (-10bp contribution). Meanwhile, the food and non-alcoholic beverage division, driven by bread prices, rose 0.6% from June, contributing 12bps to July inflation, while core inflation - prices excluding food and energy - recorded a similar gain to that of the headline print. With only a slow economic recovery expected, inflationary pressures are likely to remain under control, allowing the central bank to keep rates at its technical floor of 0.5% for a prolonged period.
Service prices fell from June, reflective of weak domestic demand. Overall, core prices (excluding food and energy) rose 0.1% from June, 0.2pp lower than in July last year. The low print was explained by service prices dropping 0.1% MoM (+0.4% last year), in part pulled down by falling rental prices, while core goods component rose 0.4% from June, significantly more than the 0.1% gain recorded in July last year. Food prices gained 0.6% (as bread rose 1.4% and fresh fruit and vegetables gained 0.8%), while energy prices dropped for a fifth consecutive month (down 1.2% from June), a cycle that will likely come to an end shortly as oil prices recover and the CLP depreciated from recent lows.
On an annual basis, inflation continued to edge further down from the central bank’s 3% target, while core and non-tradable inflation (services) dropped significantly. Despite the continued fall in gasoline prices and the CLP recovery, rising food prices meant the pull from tradable inflation ticked up (+0.2pp to 3.4%). While energy inflation slumped to a 1.6% fall (-0.8% in June and +10% in March), food inflation edged up 0.4pp to 6.8%. Excluding the volatile food and energy prices, inflation dropped 0.2pp to 1.8%, the lowest since March 2018. Non-tradable inflation is dragging core prices down, as it fell 0.5pp to 1.4%, far below the 4.2% average in the last decade, and only higher than the 1.3% recorded at the close of 2009.

We expect inflation to end the year at 2.3% (above the 2.0% expectation of surveyed analysts, according to the central bank), as some inflationary pressure from consumption-directed spending of the 10% pension withdrawal and recovering global oil prices limit further declines.

Miguel Ricaurte
Vittorio Peretti

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