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Inertia and the full effect of the VAT on services should keep inflationary pressures elevated ahead.

Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra


Consumer prices increased 0.8% from December to January (1.2% a year earlier), above the Bloomberg market consensus of 0.5% and our 0.6% call. The monthly increase was also 30bps above the central bank’s analyst survey released last month. Food and non-alcoholic beverages (1.0% mom; +23bps; led by bread), tobacco and alcoholic beverages (+12bps; lifted by wine and an expected cigarette price adjustment) along with healthcare, household maintenance items and apparel (contributing a combined 26bps) were the main price drivers in the month. The upside pull was partly offset by the drop in transportation prices (-3bps; led particularly by fuel prices). Consumer prices excluding volatile items rose 1.2% (in line with January 2022) likely pushed up by a partial passthrough of the introduction of the 19% VAT on services (particularly for gyms, hairdressers and veterinary services, among others). In annual terms, inflation fell 50bps to 12.3%, continuing the downward trajectory from the 14.1% August peak. We estimate that the basic food basket rose by 29.1% in annual terms. While inflation and its expectations have trended down over the last quarter, and the CLP has accumulated a 20% appreciation since its October peak, we still expect an especially cautious approach by the Central Bank with regards to initiating rate cuts. We expect the central bank to wait until mid-year (when inflation is expected to be well within single-digit terrain) before starting an easing cycle that would take the policy rate to 7% by yearend, with further cuts into 2024.

The downward inflationary trend was interrupted at the margin, likely in part due to the implementation of VAT on services and overall indexation. Annual tradable prices dropped 0.7pp to 15.2% as food inflation fell 80bps to 23.9% (the first drop since November 2021). Meanwhile, energy inflation eased 3.7pp to 16.7% yoy. Non-tradable inflation fell 0.2pp to 8.8%, despite services prices remaining steady at 8.6% yoy. At the margin, inflation accumulated in the quarter ending in January was 10.4% (SA, annualized; 8.6% in 4Q22), while core inflation rose to 10.3% (annualized; 6.7% in 4Q22), but still below cycle peaks of 18.6% and 12.9%, respectively (during the May quarter).

Several factors should support the disinflationary process this year, including cooling domestic demand (we expect GDP contraction this year of around 1.1%), elevated inventories, normalizing global supply chain pressure (now close to pre-pandemic levels) and the appreciation of the CLP (responding to global copper prices but also a reduction in local risk premium). Nevertheless, inertia, risks of additional spending measures, the full effect of the VAT on services should keep inflationary pressures elevated and prevent a swifter correction. Ongoing wildfires in the central-southern regions of the country also pose upside risks. We see inflation ending 2023 at 4.3%. Our preliminary estimate for February CPI is 0.4-0.5%, leading annual inflation to around 12.5%. The analyst survey will be released on Friday, with particular interest in 2-yr ahead inflation expectations, currently at 3.3% (-20bps from the December edition).

Andrés Pérez M.

Vittorio Peretti

Ignacio Martinez Labra