Itaú BBA - CHILE – Widespread upside inflation surprise in September

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CHILE – Widespread upside inflation surprise in September

October 8, 2020

The annual inflation uptick is likely transitory amid a low base of comparison.

Consumer prices rose at a faster-than-expected pace in September, taking headline inflation above the 3% target for the first time since April. Prices gained 0.6% from August, compared to the zero in the same month of last year and exceeded both the market expectation and our call of 0.4%. As a result, annual headline inflation increased from 2.4% YoY in August to 3.1%. The surprise was generalized, spread through household equipment and maintenance fees, food, apparel, and recreation prices. Excluding volatile food and energy prices, core inflation gained 0.3% from August, 0.2pp higher than last year, keeping the annual variation at a still low 2.2% (1.9% previously). Part of the uptick in annual inflation in September is due to the low base of comparison, which will unwind in coming months (as inflation reached 3.0% by the close of last year). Additionally, significant labor market slack would support inflation retreating back below the 3% target ahead, but the continued reopening of the economy would prevent inflation from falling significantly.

In the month of September, key gains from August came from the food and non-alcoholic beverage division (1.8% MoM, 37bp contribution) amid the independence day celebrations and the significant reopening of the economy. For instance, the total population in confinement dropped from 60% at the peak of July, to 21% at the close of September. Meanwhile, within the household equipment and maintenance division (+1.0% MoM, 7 bps), furniture and electronics boosted price pressures as consumers likely made use of the increased liquidity (from the pension withdrawal and cash transfers) while working at home. Energy prices gained 0.3% from August, the first monthly rise since January as the consolidation of the global oil price recovery filters through to consumer prices. Core inflation – prices excluding food and energy – rose 0.3% from August (0.1% last year), driven by the tradable component (+1.0% MoM vs. 0.1% last year). Meanwhile, services rose a milder 0.2% MoM reflective of the overall weakness of business activity.
All annual inflation measures accelerated, but core and service inflation remain well below the central bank’s 3% target and the significant output gap prevalent mean a change to the current monetary policy stance is not anticipated. A milder drag from gasoline prices in September and accelerating food inflation supported tradable inflation ticking up 0.9pp to 4.2%. The energy inflation decline eased 0.5pp to -2.1%, while food inflation increased 2pp to 8.3%. Excluding the volatile food and energy prices, inflation edged up 0.3pp to 2.2% (2.6% average during the past decade). Non-tradable inflation remains at a low level of 1.7% (1.5% in August; 4.1% average in the last decade).

An elevated base of comparison toward yearend, amid still dampened domestic demand during heightened uncertainty point to inflation retreating from current levels in the months ahead. Nevertheless, the significant surprise in September puts an upside bias to our 2.3% yearend call.

Miguel Ricaurte
Vittorio Peretti 

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