Itaú BBA - CHILE - Low inflation in November, as expected

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CHILE - Low inflation in November, as expected

December 7, 2018

As inflation will likely dip further and the economic recovery is not consolidated, a hike in January is not a done deal

Inflation was expectedly low in November, dragged down by lower fuel prices, but core pressures were also contained. Consumer prices were flat from October (0.1% one year ago), resulting in annual inflation dipping 0.1pp to 2.8%, but remains near the central bank’s 3% target. The core measures were also under control in the month, with inflation excluding food and energy prices coming in at 2.2% (2.1% previously). Additionally, our diffusion index continued to show the persistence of downward inflationary pressures led by the tradable component. As inflation will likely dip further in coming months and the economic recovery is not consolidated, we do not believe a hike in January is a done deal despite central bank Governor Mario Marcel noting that the gradual normalization process roughly implies a (25bps) hike every other meeting.

In November, downward pressure came mainly from transport (gasoline prices fell 1.4% MoM, -0.04pp contribution), condominium expenses (-6.8%, -0.08pp), and tomatoes (-9.9% MoM, -0.05pp). Meanwhile, offsetting these pressures was the 10.3% increase in tourism packages (+0.09pp contribution) and the 14.3% gain for seasonal fruits (+0.07pp). Tradable goods prices increased 0.1% from October (0.2% one year before) as gasoline prices drop, while non-tradable goods fell 0.1% (in line with one year ago) due to the evolution of the interurban bus, air, and condominium services. Excluding volatile food and energy components, consumer prices posted a mild drop (-0.03% from October, -0.12% last year).

Core service inflation did not increase further. Total service inflation was stable at 3.5%, after peaking this year at 3.9% in September, despite the implementation of the raised minimum wage. Meanwhile, the measure that the central bank has flagged as most sensitive to output gap changes, core non-regulated services, dipped 0.1pp to 3.3% in our calculation. Non-tradable inflation came in at 3.5% (3.6% previously), ending a three-month rising period. The fuel price slowdown (13.1% vs. 15.2% previously) brought tradable inflation to 2.3% (2.4%). At the margin, inflation has been broadly stable in the second half of the year. The three-month accumulated inflation in the quarter ending in November was 3.2% (seasonally adjusted and annualized) versus 3.1% recorded as of October, as non-tradable inflation slowed to 3.8% (4.3% in October), while tradable inflation picked up to 2.7% (2.2% previously).

Wage growth in October slowed, but remains broadly stable in the moving quarter. The National Institute of Statistics (INE) reported that nominal wages grew 4.1% year over year in October, down from 4.4% in September (revised form 4.5%). Meanwhile, real wage growth increased 1.1%, from 1.3% in the previous month. As a result, in the quarter ending in October, nominal wage growth was 4.0%, stable since August, but below the 4.7% in 2Q18 and 5.3% in 1Q18. Accordingly, real wages in the quarter rose 1.1%, from 2.5% in 2Q18 and 3.3% in 1Q18. Overall, the real wage bill (considering only salaried employment), grew 2.9% in the quarter (3% in 3Q18, 4.8% in 2Q18 and 6.0% in 1Q18). The central bank is upbeat on the labor market, highlighting the effective absorption of an immigration wave into the labor market, while noting that this could partly explain slowing wage pressures.

As global oil prices plummet and growth remains moderate, inflation will likely face downward pressures going forward. We now expect inflation to end the year at 2.7%, with a null monthly variation expected in December (3% expected previously; 2.3% in 2017). The low inflation prints at the end of this year, put a downside bias to our 3% inflation forecast for the end of 2019. Nevertheless, we believe a rate hike in 1Q19 remains in line with the central bank's messaging that the level of the output gap is consistent with a smaller monetary stimulus.
 

Miguel Ricaurte
Vittorio Peretti



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