Itaú BBA - CHILE – Inflation moderates amid coronavirus shock

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CHILE – Inflation moderates amid coronavirus shock

Maio 8, 2020

Low oil prices and a widening output gap mean inflation would remain contained going forward.

Consumer prices were flat (0.0%) from March to April (+0.3% last year), leading to headline inflation ticking down 0.3pp to 3.4% YoY, as weaker demand and low oil prices counter FX weakening pressures. The monthly variation (-0.048%) was close to our call of 0.1% drop (same as the Bloomberg market consensus). Inflationary pressures in the month were led by food prices that could, in part, be explained by increased demand (stockpiling) during the coronavirus lockdowns and supply chain disruptions. Developments in the global oil market led to falling fuel prices, while the loosening labor market and downbeat confidence favor the apparel drag. The temporary elimination of stamp tax also aided lower inflationary pressures. While tradable inflation remains the inflation driver following previous CLP depreciation filtering through to consumer prices, core inflation measures fell from March, reflecting initial signs that the expected widening of the output gap would contain inflationary pressures ahead.

Half of the 12 inflation divisions posted monthly falls, while another three divisions were flat in the month, pointing to easing inflationary pressures. The rise of bread (1.0% MoM), beer (2.5% MoM) and rental prices (0.8% MoM) contributed 10bps to the headline inflation gain. Meanwhile, the fuel price drop (4.0% MoM) and lower financial costs (-40.0% MoM) boosted downside pressure with a combined contribution of -20bps. Overall, excluding food and energy prices, consumer prices declined 0.1% (0.2pp down from last year), led by falling core service inflation (-0.2%; down from the 0.1% gain last year), linked to financial expenses, while the core goods component was flat from March (down from the 0.1% rise last year).

On an annual basis, core inflation is falling as domestic demand falters and the government implements relief measures, while food prices remain a key driver behind headline inflation. Non-tradable inflation dropped 0.3pp from March to 2.1% (2.7% in February and 4.2% average in the last decade). Energy prices moderated sharply from 9.9% to 6.0% as oil prices slumped. Meanwhile, food prices accelerated 50bps to 6.6% (led by fresh fruit and vegetable: 10.7%). Overall, tradable inflation eased from a more than four-year high in March (4.9%) to 4.6%. Total core inflation (excluding food and energy prices), inched down 0.2pp to a low 2.3%, below the central bank’s 3% target. 

The significant widening of the output gap is set to be the dominant force for the inflation trajectory. The noteworthy CLP depreciation since 4Q19 poses upside inflationary pressures. Nevertheless, weakened demand, along with falling oil prices, will mean that the net-effect will be a significant diminishing of inflationary pressures ahead. We see inflation ending the year at near the 3% target, with risks tilted downwards.

Miguel Ricaurte
Vittorio Peretti

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