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Inflationary pressures at the margin are falling swiftly.
07/07/2023 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra

Inflation fell in June, while core pressures were flat sequentially, surprising both the market and the central bank to the downside. Consumer prices fell 0.2% from May, well below the market expectations and our call of +0.1% (IPoM: +0.2%). The monthly variation was well below the 0.9% increase in June last year, resulting in the annual CPI print falling 1.1pp to 7.6%, the lowest rate since December 2021 (14.1% cycle peak in August). Key drags in the month came from apparel and transportation (mainly fuels), while the surprise to us was concentrated in household appliances, personal hygiene, domestic services and tourism packages. Core inflation (prices excluding volatile items) was flat from May, below our expectation of 0.2% (IPoM: 0.3%), and below the 0.7% last June. In annual terms, core inflation dropped 80bps to 9.1%, the lowest since May 2022. The most recent prints have shown lower-than-expected inflationary pressures at the margin, likely consolidating a scenario where the easing cycle starts later this month with at least a 50bp cut. Looking ahead, the odds increase that the yearend rate comes in below the 8.75% signaled by the central bank as its central scenario.


Inflationary pressures at the margin are falling swiftly. Annual tradable prices dropped 1.4pp to 7.3% as food inflation fell 0.9pp to 11.8% (from a 24.7% peak in December). According to our estimates, the basic food basket rose 12.4% yoy. Meanwhile, energy inflation eased by a further 3.7pp to 2.1% yoy (September peak of 23.9%). Non-tradable inflation is also falling, but somewhat more gradually amid greater inertia, down 0.8pp to 7.9%. Services inflation is down 1.1pp, to 7.0% yoy, while core services dropped a milder 0.5pp to 8.8%. At the margin, inflation accumulated in the quarter was 2.2% (SA, annualized; 6.5% in 1Q23 and 8.1% in 4Q22). Meanwhile, core inflation reached 6.3% (SA, annualized; 11.5% in 1Q23 and 6.7% in 4Q22).



We expect inflation to close the year below our current 4.5% call. Consecutive downside inflation surprises, oil price dynamics and a well-behaved CLP appear to have more than offset pressures coming from double-digit nominal wage growth, including the effects of the large minimum wage adjustment. Our preliminary estimate for July CPI is 0.2-0.3%, leading annual inflation to fall 1.2pp to 6.4%. There are several moving pieces for July, with flash floods lifting fruit & vegetable prices (particularly potatoes), cigarette prices being adjusted upwards, while electricity prices are likely to fall. Early next week, the central bank will release both the analysts and trader survey, both likely to show downside revisions to inflation expectations and rates.