Itaú BBA - CHILE – Signs of moderating inflationary pressures in March

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CHILE – Signs of moderating inflationary pressures in March

Abril 8, 2020

We see inflation falling closer to the 3% target in 2Q20.

After five consecutive months of acceleration, headline inflation ticked down 0.2pp to 3.7% YoY in March, as weaker demand counters pass-through pressures. Consumer prices increased 0.3% from February to March, 0.1pp below our expectations and 0.2pp lower than last year. Inflationary pressures in the month were led by the seasonal rise in education prices (although below our expectation and historical patterns), along with health prices. While tradable inflation remained stable and high, non-tradable inflation fell. The latter development is expected to continue as the negative output gap widens. As such, the central bank would remain comfortable keeping its policy rate at its technical minimum of 0.5% for a significant period.  

Together the rise of university fees (3.3% MoM), new vehicles (1.7% MoM) and bread prices (2.2% MoM) contributed 18bps to the headline inflation gain. Meanwhile, the volatile tourism packages and interurban transportation were the key products that dragged inflation down in the month (20bps combined). Overall, excluding food and energy prices, consumer prices also increased 0.3% (0.1pp down from last year), led by rising core service inflation over the month (0.4%; but far milder than the 0.7% gain last year), linked to education and health, while the increase for the core goods component was 0.1% (up from the 0.1% drop last year). With the Chilean economy all but shutting down at the close of March and start of April, leisure related prices (tourism packages, air travel, restaurants and hotels to name a few) are likely to moderate significantly ahead.

On an annual basis, core inflation is falling as domestic demand falters, while energy and food prices remain key drivers behind headline inflation, although the former is set to unwind given developments in the global oil market. Non-tradable inflation dropped 0.3pp from February to 2.4% (4.2% average in the last decade). Energy and food prices were stable at 9.9% and 6.1%, respectively, leaving tradable inflation at a more than four-year high of 4.9%. However, when food and energy are excluded, tradable inflation was still low at 2.7% (2.3% at the close of 2019). Total core inflation inched down 0.2pp to a low 2.5%, below the central bank’s 3% target. Additionally, our diffusion index hints at disinflationary pressures increasing ahead as domestic demand stumbles. 

The rapidly increasing negative output gap, amid an activity contraction, and falling oil prices would more than offset inflationary pressures from CLP deprecation pass-through to tradable prices. We see inflation falling closer to the 3% target in 2Q20.

Miguel Ricaurte
Vittorio Peretti

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