Itaú BBA - CHILE – November inflation fall underscores transitory nature of recent upside surprises

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CHILE – November inflation fall underscores transitory nature of recent upside surprises

December 7, 2020

Inflation came below expectations, hinting that pressure form pension withdrawal faded.

Consumer prices in the month of November fell 0.1% from October (+0.1% last year), surprising both the market and us (+0.2%) to the downside. The surprise was broad-based, but came mainly from a significant drop in apparel prices, an indication that recent pressures from the liquidity boost (pension withdrawals) faded. Overall, annual headline inflation ticked down from 3.0% to 2.7%. Food was a key price driver in the month (0.2% MoM), while after two months of gains, energy prices slumped 0.4% from October. Excluding volatile food and energy prices, core prices declined 0.2% from October, similar to last year, leading to annual variation at a still low 2.3% (2.4% previously). Despite price pressure easing in November, the approval of a second pension withdrawal this month would likely result in a return of transitory consumption pressures. Nevertheless, significant labor market slack would mean the central bank would opt to retain the significant monetary impulse for a prolonged period with rates remaining at 0.5% through 2021.

In the month of November, the apparel division unwound some of the significant price gains in previous months. Apparel dropped 4.9% from October, subtracting 17bps from the headline reading. A drop in housing services prices (-0.2% MoM; +2bps), particularly condominium fees, was another key drag. Meanwhile, food and non-alcoholic beverages posted a monthly variation of 0.2% (+4bp contribution).

Service inflation remains historically low, but a gradual normalization process amid the economic recovery is consolidating. Milder drags from food (1.2pp down to 6.8% yoy) and goods (-0.9pp to 3.6% yoy) led to tradable inflation moderating to 3.2% (3.9% in October). Yet, excluding food and energy prices, core tradable inflation came in at 3.6% yoy (3.2% previously). Non-tradable inflation, reflecting services, edged up 0.3pp to 2.2% (4.1% average in the last decade).

The expectation that the latest pension withdrawal initiative supports a return of demand for goods in December means we see inflation ending the year near the 3% target. Continued transitory pressure early next year from the aforementioned liquidity injections, along with the gradual narrowing of the output gap would support inflation remaining near the target in 2021.

Miguel Ricaurte
Vittorio Peretti

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