Itaú BBA - CHILE – Still well-behaved inflation in November

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CHILE – Still well-behaved inflation in November

Dezembro 6, 2019

Tradable prices are starting to push inflation up

Consumer prices rose 0.1% from October to November (0.1% drop one year earlier), in line with the Bloomberg market consensus and our call. A reversal of an electricity tariff hike in October was a key drag for the monthly number. As a result, annual inflation ticked up 0.2pp to a still-low 2.7%, mainly due to an acceleration of the tradable component, while non-tradable inflation remained broadly stable at historical lows of 2.5%. We expect inflation to pick-up significantly in coming months due to the CLP depreciation. Yet, the widening negative output gap and some regulated price freezes would partially counter the gains. Overall, uncertainty over upcoming inflation dynamics is elevated and a key factor behind the central bank’s cautious indication of keeping rates stable over coming months. 

Fruit prices rose 10.3% MoM, contributing 0.1pp to the headline variation while other food produce added 0.15pp, highlighting potential risks going forward as Chile is set to experience a severe drought. The 4.4% electricity tariff rise in the prior month was almost fully unwound (-0.1pp contribution), while other housing related services and transportation prices added to downside pressures in the month. The recreation and culture division was one of the key risk areas for this month’s inflation but there was a downside surprise to tourism packages (1.1% MoM vs. 6% expected). Overall, excluding food and energy prices, inflation was -0.2% (-0.1% last year), as flat core goods inflation over the month (-0.1% last year), was countered by the 0.2% drop for the core service component (-0.1% last year). 

On an annual basis, tradable prices are pushing inflation up. The energy inflation drag remained at 1.9% yoy, but food prices ticked up 1.1pp to 3.8%, leading to tradable inflation rising 0.4pp to 2.9% (highest since September last year). Inflation excluding food and energy prices edged down 0.1pp to 2.5%, below the central bank’s 3% target. Nevertheless, our diffusion index (variations above and below the 3% target) shows inflation is becoming more spread, mainly due to tradable prices.

We expect inflation to end 2019 at 3.2%, accelerating further during the start of 2020 toward the upper bound of the central bank’s 2%-4% range around the 3% target as pass-through unfolds. Yet, with domestic demand pressures set to implode, some disinflation to 3.3% by the close of next year is likely.

Miguel Ricaurte
Vittorio Peretti

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