Itaú BBA - CHILE – Unsurprising August inflation

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CHILE – Unsurprising August inflation

September 8, 2020

The economic reopening and oil price recovery will counter dampened domestic demand, preventing inflation falling significantly further

In line with market expectations, weak domestic demand and still-falling fuel prices resulted in a consumer price rise of 0.1% from July to August (0.2% last year), leading to a headline inflation drop of 0.1pp to 2.4% YoY. Transportation prices remained a key drag (12bps), affected by restricted demand and low global oil prices. Meanwhile, the seasonal change and FX pass-through led to apparel being the significant price pull in August (+7bps). Food price pressures (+5bps) and rent adjustment (4bps) also drove prices in the month. Core inflation – prices excluding food and energy – rose 0.2% from July (0.1% last year). Going forward, the reopening of the economy and oil price recovery will likely counter dampened domestic demand, preventing inflation falling significantly below current levels.

Despite rentals rising 0.6% in the month, total services were flat from July, indicative of the weak domestic demand. Food prices gained 0.2% (as meat rose 0.8% and dairy products increased 0.6%), while energy prices dropped for a sixth consecutive month (down 1.0% from July), a cycle that will end this month given recent gains in global oil prices.
 
On an annual basis, inflation continued to edge further down from the central bank’s 3% target, while core and non-tradable inflation remain at historically low levels. The continued drag of gasoline prices, along with easing food inflation over twelve months led to tradable inflation ticking down 0.1pp to 3.3%. Energy inflation slumped to a 2.6% fall (-1.6% in July and +10% in March) and food inflation edged down 0.5pp to 6.3%. Excluding the volatile food and energy prices, inflation edged up 0.1pp to 1.9% (2.6% average during the past decade). Non-tradable inflation remains sticky at a low level of 1.5% (1.4% in July; 4.1% average in the last decade). Our diffusion index reflects contained domestic demand, while the drag from the tradable component is moderating.



Recovering oil prices and the expected boost to consumption from support measures (direct aid programs, subsidies, payment deferrals, tax cuts, and the approval of the partial withdrawal of pensions) would limit further downside pressures on inflation. Yet, an elevated base of comparison will lead yearend inflation to 2.3% (3.0% last year).

Miguel Ricaurte
Vittorio Peretti 



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