Itaú BBA - CHILE – Inflation falls in May

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CHILE – Inflation falls in May

Junho 5, 2020

A swiftly loosening labor market and low oil prices lowered inflationary pressures

Consumer prices dropped 0.1% from April to May (+0.6% last year), leading to headline inflation falling 0.6pp to 2.8% YoY, as a swiftly loosening labor market and low oil prices reduce inflationary pressures. The exact monthly variation was -0.05%, compared to our 0.0% (also the Bloomberg market consensus). In line with the social mobility restrictions and still low global oil prices, inflationary pressures in the month were dragged down by transportation prices (-8bp contribution), and hospitality related services, such as hotels and restaurants (-4bps). Lifting prices in the month were household furniture and equipment (3bps), as long stay at home periods likely increased demand for appliances, along with some food produce (meat in particular: 4bps) and cigarettes (3bps). While tradable inflation remains above headline inflation following previous CLP depreciation, it has slowed significantly. Meanwhile, core inflation dropped to its lowest rate in one year. Such dynamics will likely persist going forward as the expected widening of the output gap would suppress inflationary pressures.

Core prices (excluding food and energy) rose a mild 0.1% from April, 0.3pp lower than in May last year. Core service prices were flat from April (+0.2% last year), with rentals falling for the first time since 2010. Meanwhile, the core goods component was up 0.3% from April, but significantly milder than the 0.7% recorded in May last year. Energy prices dropped for a third consecutive month (down 1.5% from April). Meanwhile, food prices were flat from April.

On an annual basis, inflation dropped below the central bank’s 3% target and core pressures are even more contained. Developments in the oil market along with weakened domestic demand led to significantly milder pull from tradable inflation (down 1.1pp from April to reach 3.5%). Energy inflation slumped sharply from 6.0% in April to a 0.2% fall, meanwhile food price inflation was steady at 6.6%. Non-tradable inflation dropped 0.2pp to 1.9% (4.2% average in the last decade), similar to the drop in total core inflation (excluding food and energy prices), which came in at 2.1%. If transportation, restaurants, hotels and recreation prices (services severely affected by the lockdown and with low price availability in the month) are also excluded, core inflation was stable at a low 1.7%, reflecting core demand is limited.

Inflationary pressures are set to remain under control, ending the year at 2.6% (3% last year). Weakened demand, along with still low oil prices and some CLP appreciation, will likely keep inflation below the target this year.

Miguel Ricaurte
Vittorio Peretti

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