Itaú BBA - CHILE – Low and stable inflation in April

Macro Latam

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CHILE – Low and stable inflation in April

mayo 8, 2019

Contained inflationary pressures and sluggish activity justify stable rates

Inflation came in line with expectations in April (0.3% MoM, in line with one year ago), resulting in a stable annual variation at 2% and affirming that inflationary pressures remain contained. Meanwhile, the core measure (excluding food and energy prices) posted a 0.1% MoM increase (below the 0.2% recorded last year), resulting in the annual variation ticking down 0.1pp to 1.9%. With headline and core inflation broadly stable and far below the central bank’s 3% target, sluggish activity at the start of the year (leading to a widening of the output gap) and external risks elevated, we expect the policy rate to be kept at 3% at tomorrow’s monetary policy meeting. Stable rates ahead is also likely to remain the key message.

Food and the transportation divisions led inflationary pressures in the month. The 3.5% increase in gasoline prices (as high global prices filter through to consumers) along with the seasonal increase (Easter holiday) in interurban transportation prices (+1.0% MoM) resulted in the Transportation division contributing 0.08pp to the monthly variation of headline inflation (0.3%). Meanwhile, the Food and Non-Alcoholic Beverage division gained 0.5% from March, lifted by dairy produce (cheese, milk), contributing 0.09% to the headline gain. Seasonal adjustments to rental contracts was another driver in the month (0.7% MoM; 0.04pp contribution). Partly countering the inflationary pressure was the decline in the Apparel division (-0.02pp).

On an annual basis, energy inflation is no longer a drag, after rising to 2.7% (1.8% in March). Meanwhile, food inflation ticked up 0.1pp to 2.0% as some pressures from the Easter period filtered through. As a result, tradable inflation edged up 0.1pp to a still low 1.2%. Meanwhile, measures more sensitive to the output gap showed mild decreases (of 0.1pp) to 3.0% for non-tradable inflation and 2.8% for service inflation.

As domestic demand consolidates and tradable inflation normalizes, we expect inflation to gradually move towards the 3% target. The expectation of higher-than-anticipated tariff adjustments to electricity prices (between May and June) and elevated global oil prices that could result in gasoline inflationary pressures extending for longer, have made us revise our yearend forecast to 2.8% (from 2.6% previously).

Miguel Ricaurte
Vittorio Peretti

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