Itaú BBA - CHILE – Surprise inflation drop will keep easing cycle discussion alive

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CHILE – Surprise inflation drop will keep easing cycle discussion alive

October 6, 2017

Inflation for 2017 will likely come in somewhere closer to the 2% lower bound of the central bank’s target range.

Consumer prices came in well below market expectations in the month of September, keeping the topic of further monetary easing relevant. Overall, inflation dropped to 1.5% year-over-year (from 1.9% previously), falling further below the lower bound of the central bank’s 2%-4% target range and the lowest rate since May 2013. Both the Bloomberg market consensus and our forecast was 1.9%. Tradable inflation remains the main drag to inflation, posting a zero gain over the last year (from 0.7%), while non-tradable inflation was stable at a comfortable level (3.3%). 

The central bank’s baseline scenario sees the policy rate stable at 2.5% for a prolonged period. However, it has highlighted downside risks to inflation in the short-term, which, on materialization, could lead to more easing if the inflation trajectory to 3% comes under threat. In our view, today’s data is indicative these risks can all but be ruled out, and so we cannot discard further cuts in coming months. On the other hand, the fact that inflation slowed due to lower tradable inflation, likely a reaction to the appreciation of the Chilean peso, could lead the board to treat the September CPI surprise as one-off, at least for now.   

Consumer prices fell 0.2% from August to September, below the +0.2% variation recorded one year ago, and the lowest September print on record. The monthly print was inferior to the Bloomberg market consensus of +0.3% and our +0.2% expectation. The downward pressure was widespread with seven of the 12 divisions registering declines from August. The principal group driving the price fall in the month was the food and non-alcoholic division (0.6% decrease and a -0.1pp contribution to the total) and housing services (-0.4% and -0.1pp contribution) as electricity tariffs dragged prices down. Meanwhile, the transportation division, amid the national holiday period, was the principal driver of inflation in the month (+0.1pp contribution). Tradable goods prices fell 0.4% (+0.3% last year), pulled down by electricity prices, tourism packages and soft drinks. On the other hand, non-tradable prices rose 0.2% from August (in line with one year ago) lifted mainly by transportation. Excluding food and energy, prices were flat from the month (as was the case last year).

radable items remain the main drag on inflation at 0% year-over-year (0.7% previously), supported by the strengthened currency. Meanwhile, non-tradable inflation is 3.3% (stable from August). Once food and energy prices are excluded, inflation was stable at 1.8%, as was service inflation at 3.3%. Our diffusion index, stable since June, is at low levels and shows that price pressures are limited. The composition shows diminishing downward pressure from the tradable component, while non-tradable upward pressure is moderating. Thus, indexation mechanism at work could prolong the below-target inflation period.

Overall, inflation for 2017 will likely come in well below our 2.4% forecast, somewhere closer to the 2% lower bound of the central bank’s target range. Inflationary pressures going forward will likely be contained by the performance of the Chilean peso and inertia. On the other hand, an improving outlook for activity, along with a low base of comparison, and well-anchored inflation expectations provide support for a gradual convergence to the 3% in the two-year horizon.


Miguel Ricaurte
Vittorio Peretti

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