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Central Bank to continue easing.
2024/01/08 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra

0Consumer prices fell by 0.5% in December (+0.3% one year earlier), resulting in annual inflation ending 2023 at 3.9% (down from 4.8% in November), well below the 4.5% estimated by the Central Bank in the December Monetary Policy Report. The monthly price decline was significantly greater than expected by the market (-0.1%, range between -0.2 % and +0.2%) and our call (-0.14%). The vast majority of CPI divisions (10 of the 12) had declines in monthly variations, while one increased and another was flat. Core inflation (ex-volatiles) fell by 0.2% MoM, leading to a 60bp drop to 5.4% YoY. The surprise to our call was widespread, with volatile items (particularly tourism packages playing a key role at -7.5% MoM) and core prices also underwhelming (health and transportation). The disinflation process unfolded more swiftly throughout 2023, supporting the loosening of a still tight monetary policy. A year ago, analysts expected yearend 2023 inflation at 5.3%, 1.4pp above the actual 3.9%. The large downside surprise to the Central Bank in December (0% implicit expectation in headline and +0.15% in ex volatiles for December from the 4Q IPoM), will raise prospects for another acceleration in the pace of rate cuts (-75bp in December). With limited demand-side inflationary pressures, we expect the central bank to continue easing and taking the policy rate towards neutral during 2024. 

Inflationary pressures at the margin are near target levels. Prior CLP depreciation had led to greater tradable price momentum at the margin in previous months, but the BCCh decision in October that steadied the CLP dynamics led to a softening of tradable inflation at the end of 2023. Tradable prices dropped 1.1% MoM, leading to a 1.5pp fall in annual inflation to 2.3% (15.9% in 2022). The food price pull eased (-2.1pp to 5.2%), the energy price drag persisted at -1.1% YoY, while overall goods fell 1% MoM (-1.1pp from November to 2.5% YoY). On the other hand, non-tradable inflation was stable at 6.1%. Services was down 0.5pp to 5.6% YoY, but excluding volatile items, core services remained steady at 7.5%. At the margin, inflation accumulated in the quarter declined sharply to 3.6% (SA, annualized; 3.0% in September), while core inflation sits at 2.6% (SA, annualized; in line with the Sep23 reading). 

Weak labor demand dynamics will continue to keep demand-side inflationary pressures contained. The central bank’s index of online job postings (a labor demand proxy) fell by 34% YoY in December, a larger contraction with respect to previous months (-27% in November; -29% in October), keeping the level of labor demand well below pre-social unrest levels and inching closer to the levels reached during the Covid lockdowns. The decline in the month was broad-based across sectors and regions. Weaker labor demand at the margin is also consistent with business confidence data released earlier this month. Even though the faster than expected decline in inflation is supporting an improvement in real incomes, weak labor demand and rising layoffs suggest slack in the labor market should continue.

The lower inflation end to 2023 puts a downside bias to our 3.1% call for this year amid lower indexation and greater signs of softer overall inflationary pressures. Next month will see the introduction of the new CPI basket that increases the weight of goods relative to services. In our view the adjustments should not generate a significant effect of CLP dynamics. Until methodological changes to the measurement of items such as tourism packages and air travel are incorporated, Chile’s CPI will remain exceptionally volatile. We preliminarily expect inflation of 0.3% for January, to be released on February 8, 2024.