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CHILE – Upside inflation surprise in March

April 8, 2019

A moderation in downside inflationary pressures is in line with the view that low inflation is transitory

Inflation surprised to the upside in March, the first such case in the months since the introduction of the new consumer basket. Consumer prices rose 0.5% from February (0.2% one year ago), higher than the 0.4% Bloomberg market consensus and our 0.3% call. As a result, annual inflation increased from 1.7% in February to 2.0% (the lower bound of the range around the central bank’s 3% target). The surprises were widespread, and our diffusion showed a moderation in downside inflationary pressures, a development in line with the view that low inflation is transitory and the path to the target would unfold.

The seasonal increase in education prices led the overall monthly variation of inflation and explained most of the surprise to us. The 4.5% increase in the Education division accounted for 0.3pp of the total 0.5% variation. Other notable drivers were the Food and Non-Alcoholic Beverage division (0.2pp contribution), led by legumes and meat prices. Partly countering the inflationary pressure in the month was the decline in the Transport division (-0.2pp) given the end of the peak season, considering that the Easter holiday will be in April this year (vs. March last year) and the drop in fuel prices.

Energy and food inflation gathered steam in the month, but core inflation was stable. Energy inflation rose to 1.8% (0.8% in February) and food prices increased 1.9% (1.2% previously) resulting in tradable inflation picking up to 1.1% (from 0.6%). Hence, excluding volatile food and energy prices, inflation was stable at the still low 2.0%. Meanwhile, measures more sensitive to the output gap development showed mild increases with non-tradable inflation moving up 0.1pp to 3.1% and service inflation now at 2.9% (2.8% previously).

We expect inflation to continue to pick-up as the year unfolds, but to still end below the 3% target. The normalization of tradable inflation and the consolidation of domestic demand would aid higher prints. We see inflation of 2.6% (in line with 2018), with further normalization to 2.9% next year. Overall, the still low inflation, looser policy stance by the main central bank globally, and risks to global economic growth suggest there is no haste to remove stimulus in the near term.

Miguel Ricaurte
Vittorio Peretti

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