CHILE – Lower-than-expected inflation in June

Elevated global oil prices and added liquidity injections would pressure inflation in coming months

Vittorio Peretti 


Consumer prices increased 0.1% from May to June (-0.1% last year), below market expectations (Itaú and Bloomberg consensus: 0.3%). The transportation division was expectedly the key driver during the month (1.0% MoM, +12bp contribution). Around two-thirds of the contribution came from fuels (2.8% MoM), as the consolidation of higher oil prices continue to gradually filter through to the economy (we expect increases to continue until early September). The key downside surprise to us came from falling apparel and household equipment (accounting for around half of the surprise). Excluding food and fuels, consumer prices fell 0.1% from May (in line with last year). As a result, annual inflation increased 0.2pp to 3.8%, while after excluding volatile items annual inflation eased 0.2pp to 3.2%. Going forward, fuel prices will remain a key driver, while added liquidity from expanded fiscal transfers would pressure goods inflation and the reopening of the economy (currently less than 10% of the population is under the strictest quarantine measure) will likely see service inflation continuing to normalize. Along with the low base of comparison, annual inflation is expected to transitorily exceed 4% during 2H21.

A rising energy price pull in annual terms (+2.8pp to a 8.5% YoY increase), and broadly stable annual food inflation (-0.2pp to 4.6% YoY) led to tradable inflation rising 0.1pp to 4.9%. After excluding food and energy prices, inflation was steady at 3.1% (near the central bank’s 3% target). Although prices of goods fell sequentially, it remains the key driver of annual inflation (+0.1pp to 5.2%), while a service price normalization is gradually unfolding (+0.2pp to 2.4%; still well below the 4% average during the previous decade) as the economic recovery advances. Our diffusion index shows a slowly diminishing pull from food and other tradables (potentially signaling some supply normalization).

The reopening of the economy as the vaccination program advances (over 70% of the adult population is fully vaccinated), and the expanded fiscal transfers to unfold during 3Q (around 1% of GDP per month), the consumption-led economic recovery will consolidate. We expect yearend inflation of 4%, and for the central bank to start its normalization cycle at next week’s meeting with a 25bp hike to 0.75%.

Vittorio Peretti