Itaú BBA - CHILE – Lower-than-expected inflation in December

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CHILE – Lower-than-expected inflation in December

Janeiro 8, 2020

Despite the lower-than-expected inflation, our diffusion index points to above-target prints in coming months

Consumer prices gained 0.1% from November to December (0.2% drop last year), below the Bloomberg market consensus and our call of 0.2%. A sharper price drop in the food division and a fall in tourism packages (despite the recent CLP depreciation) were key factors behind the surprise, while rising energy prices and transportation services lifted prices. As a result, inflation in 2019 came in at the central bank’s 3% target, up from 2.7% in November (2.6% in 2018), but inferior to the central bank’s expectation of 3.4% (updated in the 4Q19 Inflation Report). Given the recent appreciation of the Chilean peso, the expected pass-through to consumer prices could be lower than initially anticipated by the central bank (3.5% inflation expected for 2020), which along with poor internal demand, could make lower rates ahead viable.

The seasonal rise of interurban transportation prices (16% MoM) and higher fuel prices (2.2% MoM) together contributed 13bps to the headline inflation gain. Meanwhile, a double-digit decline in tomato prices and shrinking fees for tourism package prices helped contain inflation pressure in the month (combined contribution of -7bps). Overall, excluding food and energy prices, inflation was 0.1% (in line with the year before), as falling core goods inflation over the month (-0.3%; -0.1% last year), was countered by the 0.4% rise for the core service component (0.2% last year).

On an annual basis, non-tradable inflation is broadly stable near historical lows, while rising tradable prices lifted overall inflation. With service inflation stable at 3.6%, non-tradable inflation edged up only 0.1pp to 2.6%. Energy prices pulled up prices with a 5.6% yoy gain (1.9% in November), while food prices ticked down 0.1pp to 3.7%, leading to tradable inflation rising 0.4pp to 3.3% (highest since July 2016). Inflation excluding food and energy prices was flat at 2.5%, below the central bank’s 3% target.

Despite the lower-than-expected inflation, our diffusion index (variations above and below the 3% target) shows inflation becoming more widespread, mainly due to tradable prices, and in line with our expectation of above-target prints in coming months. However, some moderation thereafter is likely as weak internal demand (along with some regulated price caps) and the recent CLP appreciation diminish pressures, leading to near-target inflation for 2020.

Miguel Ricaurte
Vittorio Peretti

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