Itaú BBA - CHILE – Low inflation in June

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CHILE – Low inflation in June

julio 8, 2019

Given our outlook of a growth slowdown this year, we do not expect a notable acceleration of inflation

Inflation in June came in above market expectations, led by volatile components, while core measures remain restrained. The CPI was flat from May (+0.1% one year ago), above our call of a 0.1% monthly drop. As expected, food prices drove inflation in June, while falling apparel (end of season) and transportation prices (end of winter vacation deals) countered the gains. Overall, the surprise to us came principally from tourism packages that did not revert the notable gains registered in the previous month. As a result, the annual variation was stable at a low 2.3%, and output gap sensitive measures, along with our diffusion index, do not point at accelerating inflationary pressures. We expect growth to underwhelm central bank expectations, leading to a sharper widening of the output gap and limit inflationary pressures, which would justify additional monetary stimulus (2% yearend policy rate).

Rising meat and fruit prices contributed a combined 5bps to the headline variation (0% MoM). Meanwhile, tourism packages rose 2.0% MoM (2bps contribution), building on the 23% increase in the previous month. Going forward, upside pressures may persist as we approach the Chilean national celebration in September and energy prices continue to rise. Partly containing the gains in the month was the 0.3% decline in transportation prices (-3bps) and the drop in apparel (-2bps). Both inflation excluding volatile food and energy prices as well as non-tradable prices were unchanged from May (-0.1% and +0.2%, respectively, last year), while tradable prices ticked up 0.1% (0% in 2018).

Output gap sensitive measures stay low. Core inflation (prices excluding food and energy) came in at 2.1%, hovering around the lower bound of the central bank’s 2%-4% range around the target as has been the case so far this year. Meanwhile, non-tradable inflation (a measure sensitive to demand pressures) posted a third consecutive monthly decline, reaching 2.8%, the lowest level since the global financial crisis. Tradable inflation was stable at 1.9%, still a notable drag but recovering from the 0.6% year low in February.

Given our outlook of a growth slowdown this year, we do not expect a notable acceleration of inflation. We see inflation gradually edging up to 2.8% by yearend (2.6% in 2018; 3% target).

Miguel Ricaurte
Vittorio Peretti


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