CHILE – Large inflation surprise consistent with a 100bp rate hike next week

The rising pull from tradables in part reflects CLP pass-through

Andrés Pérez & Vittorio Peretti


Consumer prices increased 1.2% from August to September, above the Bloomberg market consensus and our call of 0.8%, and the 0.6% from the Central Bank’s analyst survey. The monthly variation was 0.54pp higher than in September last year, and is the largest monthly increase since mid-2008. As a result, annual inflation increased to 5.3%, the highest rate since November 2014. The key drivers in the month came from the food and non-alcoholic beverage division (+2.1% MoM; +42bp contribution), primarily beef prices (+20bps). The transportation division increased 2.7% from August (+36bps), lifted by new vehicles (responding to increased demand from substantial liquidity injections and global supply constraints) and air travel as the economic reopening consolidates. Gas and water prices pressured the housing and basic services division (+0.7% MoM; +10bps). Excluding food and fuels, consumer prices rose 0.9% from August (+0.6pp versus last year), while inflation excluding volatile items increased a milder 0.7% (+0.3pp over one year). On an annual basis, inflation excluding food and energy sits at 4.6% and 4.4% for CPI excluding volatile items. While the September print may not be inconsistent the Central Bank’s forecasts given its above market expectation of 5.7% for the year (analyst survey: 5.1%), other market developments are likely of more concern. Yesterday, the results of the Central Bank’s financial operator survey showed the relevant two-year inflation expectation remained at 3.5%, well above the 3% target. Additional CLP depreciation since the last monetary policy meeting, driven by domestic factors and hence with a larger and more persistent pass-through, will likely maintain pressure on inflation expectations. As a result, the Central Bank is likely to increase the pace of stimulus withdrawal in a bid to take medium-term inflation expectations back to the target. We expect a 100bp rate hike next week (+25bps from the previous hike), taking the policy rate to 2.5%, and see risks for an ever larger increase.   

While annual food and energy prices are pulling inflation up, the drag from services is swiftly diminishing. Food inflation came in at 5.2% YoY (+0.3pp from August), while energy inflation rose 0.8pp from August to 15.5% YoY. Overall, tradable inflation rose 0.5pp to 6.4%, lifted by goods inflation of 6.7% (+1.6% MoM) as consumption dynamics remain robust. Meanwhile, following the rapid reopening of the economy on the back of a rapid vaccination rollout, service inflation is on the rise (+0.8% MoM), reaching 3.9% YoY (+0.6pp from August). The diminished drag from non-tradables in our diffusion index is also in line with the economic recovery underway, while the rising pull from tradable in part reflects CLP pass-through.

Following the surprise, inflation this year is likely to end closer to the Central Bank’s 5.7% estimate than our prior 5.0% call. The rising inflationary pressures will likely result in legislative pressure to regulate prices, as well as proposals related to eliminating the UF. Meanwhile, the Treasury will continue to try to mitigate increases in gasoline prices through modifications to the fuel stabilization mechanism. While lawmakers will likely seek policies to increase liquidity (fourth pension withdrawal, IFE extension) and reduce the expected fiscal drag laid out for next year, the repercussion of such policies would be an even stronger monetary policy response that could take the end-point of the cycle beyond our current call of 4.5%.  

Andrés Pérez M.
Vittorio Peretti