Itaú BBA - CHILE – Low inflation in 2017

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CHILE – Low inflation in 2017

January 8, 2018

The base case scenario is for stable rates, but signs of inflation expectation de-anchoring could lead to additional easing

For the second consecutive month, inflation failed to meaningfully surprise the market and ended the year broadly consistent with the central bank’s baseline scenario. Hence, we expect rates to remain stable at 2.5% at the January 31-February 1 monetary policy meeting. Consumer prices gained 0.15% from November to December, broadly in line with the Bloomberg market consensus and our 0.2% call. As a result, annual inflation ticked up from 1.9% in November to 2.3% (2.7% in 2016), aided by a low base of comparison. Non-tradable inflation continues to moderate and is now at the 3.0% target (3.1% in December and 4.0% in 2016). Meanwhile, for the third consecutive month, tradable inflation is less of a drag at 1.9% (1.0% in November), but is in line with the 2016 recording.

The 0.1% monthly print was far above the -0.2% recorded one year ago, mainly explained by the tradable component. The principal group driving the price gain in the month was transportation (1.4% and 0.2pp contribution), boosted end of year holidays and rising gasoline prices. The food, beverage and apparel divisions were the principal drags on inflation, contributing a pull of 0.14pp. Tradable goods prices decreased 0.1% from November (explained by new car prices and tomatoes), but is far less than the 0.8 drop one year ago. On the other hand, non-tradable prices increased 0.4% from November (similar to the +0.5% recorded one year ago). Excluding food and energy, prices increased 0.2% from the previous month (0.1% last year).

Core inflation (excluding food and energy prices) remains broadly stable and at low levels (1.9%). Our expectation is that core inflation will stay near the lower bound of the central bank’s 2-4% target range throughout 2018. Accordingly, the central bank recently noted that its outlook only sees convergence to the 3% target in 2H19. Our diffusion index posted a mild uptick in December, but is roughly in line with the average since March 2017. Overall, these levels are low and reflect limited price pressure.

The recent strengthening of the Chilean peso and an only gradual recovery of activity mean inflation will likely remain subdued most of the year. After hovering below 2% for most of 1H18, we see inflation ending the year within the target range, close to 2.5%. In this context of low inflation, we anticipate the central bank will remain vigilant of the recent strengthening of the Chilean peso and how that filters into headline inflation. As some measures of inflation expectations have persistently hovered below the 3% target, further signs of de-anchoring could lead to additional easing.


Miguel Ricaurte
Vittorio Peretti

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