Itaú BBA - CHILE – Unsurprising July inflation print favors a 25bp rate cut in September

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CHILE – Unsurprising July inflation print favors a 25bp rate cut in September

agosto 8, 2019

Low core measures and our diffusion index point at contained inflationary pressures

Inflation came in line with market expectations for the month of July, staying broadly stable at low levels, but rising apparel prices led to an upside surprise for us. Consumer prices gained 0.2% from June to July (Itaú: 0.1%), down 0.1pp from last year. Annual inflation edged down 0.1pp to 2.2%, due to a larger tradable drag, while the non-tradable inflation component was stable near historical low levels. This is the final inflation print the central bank will receive ahead of its September 3rd meeting. In the absence of a downside surprise, we expect the board to cut the policy rate by 25-bps next month (with another cut of similar magnitude in October). However, developments on the global front could still make a more aggressive move (50bps) appealing.

Rising interurban transportation prices amid the winter vacation period, health price adjustments and electricity tariff implementations contributed 18bps to the headline gain. In addition, the seasonal change led to the apparel division posting a 0.9% MoM increase, above our expectation of a decline in the month. Partly containing the gains in the month was the 0.4% decline in the tobacco and alcoholic beverage division. Inflation excluding volatile food and energy prices rose 0.1% from June (0.2% last year), non-tradable prices posted a 0.4% gain (in line with July 2018), while tradable prices were flat over the month (0.3% in 2018).

Annual inflation remains low. Core inflation (prices excluding food and energy) came in at 2.2% (0.1pp up from June), remaining near the lower bound of the central bank’s 2%-4% range around the target. Meanwhile, non-tradable inflation (core services), a measure sensitive to demand pressures, came in at 2.8%, remaining near the lowest levels since the global financial crisis. Tradable inflation edged down 0.2pp to 1.7%, remaining the key price drag. Additionally, our diffusion index continues to point at limited inflationary pressures.

We see inflation reaching 2.8% this year (2.6% in 2018). The expected increase in electricity tariffs in 2H19 and some normalization of food prices would result in a gradual increase of inflation.

Miguel Ricaurte
Vittorio Peretti

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