Itaú BBA - CHILE – Tradable inflation pushes inflation up once again

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CHILE – Tradable inflation pushes inflation up once again

Março 6, 2020

Inflation pass-through pressures will keep inflation elevated for the coming months until weakened internal demand

Inflation increased further February, as prices increased 0.4% from January to February, 0.2pp above the market consensus and 0.4pp higher than last year. A higher-than-expected rise in transportation division (particularly new vehicles and airfares, both affected by exchange rate depreciation and interurban bus fares) explains the bulk of the surprise to us, while rising food, apparel and housing related expenses also lifted inflation. As a result, annual inflation picked up to 3.9% (3.5% in January), the highest since mid-2016, while core inflation was a still-low 2.7% (up a milder 0.2pp). Still, the move by the Fed to ease monetary policy amid global economic slowdown makes our call for 50 bps of further easing (to 1.25%) likely.

Together the rise of interurban travel (12% MoM), airfares (6% MoM) red meat (2% MoM) and apparel (2% MoM) contributed 23bps to the headline inflation gain. Meanwhile, the volatile tourism packages was the key drag to inflation in the month (9bps). Overall, excluding food and energy prices, inflation was also 0.4% (0.1pp up from last year), led by rising core service inflation over the month (0.5%; 0.3% last year), linked to transportation, while the increase for the core goods component was a milder 0.3% (0.2% last year).

Energy and food prices are key factors behind the sharp inflation acceleration to 3.9% YoY (3% at the close of 2019). Non-tradable inflation is contained at 2.7% (up 0.2pp), while energy prices (up 1.4pp to 10.0% due a low base of comparison) and food prices (+1.0pp to 6.1%) pulled tradable inflation up by 0.6pp to 4.9% (highest since August 2015). However, tradable inflation excluding food and energy prices increased only a mild 0.1pp to 2.6%. Total core inflation edged up 0.2pp to a still low 2.7%, below the central bank’s 3% target. Nevertheless, our diffusion index is showing signs of creeping inflationary pressures, as the downside pressure from tradable items diminish.

Inflation pass-through pressures are being felt and will keep inflation elevated for the coming months until weakened internal demand, along with anchored inflation expectations and lower oil prices, support a disinflation process. We see a yearend rate of 3.3%, but risks are tilted to a higher close given the recent upside surprises.

Miguel Ricaurte
Vittorio Peretti

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