Itaú BBA - CHILE - Upside inflation surprise likely to delay next rate cut

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CHILE - Upside inflation surprise likely to delay next rate cut

February 8, 2017

One-off increases led the higher reading, but the general inflation trend remains downward.

Consumer price inflation surprised to the upside at the start of the year. However, the higher-than expected reading came amid one-off increases, while the general trend for inflation remains downward. On an annual basis, key measures of core inflation (such as non-tradables and prices excluding energy and food) fell substantially from the previous month. Additionally, our diffusion index continues to moderate. Still, given the better-than-expected activity numbers published earlier this week, the upside inflation surprise and the gradual monetary policy easing approach adopted by the central bank, we expect the next rate cut to be postponed to March.

Prices increased 0.5% from December to January, in line with that one year ago. The monthly variation came in above both Bloomberg’s market consensus and our forecast of +0.2%. Prices in the month were partly lifted by tobacco and alcoholic beverages, transportation prices and household and basic services, together accounting for +0.4 percentage points of the headline variation. Apparel prices as well as food and non-alcoholic beverages partly countered these increases. The majority of the upside surprise was explained by larger increases in inter-urban transportation, alcoholic beverages, natural gas prices, while there were more moderate drops in apparel and seasonal fruit prices than we expected. The non-tradable component increased 0.4% from December (0.9% one year ago), while tradable goods prices gained 0.7%, above the 0.1% last year, as international energy prices rose. Excluding food and energy, prices rose 0.5% in the month (0.9% in January 2016).

Annual inflation came in at 2.8%, only slightly up from 2.7% in the previous month, but still below the central bank’s 3% target. The pickup in inflation was led by the acceleration in tradable inflation to 2.3%, returning to the target range after the dipping to 1.7% in December. However, economic slack and indexation led to a deceleration of non-tradable inflation to 3.4%, from 4.0%, the lowest reading since the inception of the 2013 basket and since July 2013 historically. Likewise, inflation excluding food and energy prices came in at 2.5%, continuing to moderate from the 2.8% in the previous month. Annual core inflation has fallen for eleven consecutive months and is at its lowest since January 2014. Similarly, core services inflation, better reflecting domestic inflationary pressures, slowed to 3.4% (4.0% previously). Overall, we see constrained inflationary pressures going forward, as our diffusion index continues to moderate, with roughly the same amount of goods posting inflation above the 3% target than below it.

In our opinion, the January inflation figure affects the timing of the next rate cut, but not the trajectory of monetary policy nor the size of the expected easing cycle. We see the policy rate ending the year at 2.5% (3.25% currently).


 

Miguel Ricaurte

Vittorio Peretti

 



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