Chile CPI: Getting closer to the 3.0% threshold. However, the core measure remains under control
August 8, 2018 (Investorideas.com Newswire) The INE announced that CPI increased by 0.4% m/m in Jul-18, above market consensus and our own forecast (both at 0.3% m/m). With this result, the annual figure advanced 20bp to 2.7%, getting closer to the 3.0% threshold and reaching the highest level since Apr-17. For its part, core inflation (CPIEFE, which excludes foods and energy) remained stable at 1.9% y/y, standing below the floor of the BCCh target range (2%-4%) for twelve months in a row. Thus, volatile components continued to play a key role in the Jul-18 register, particularly energy due to both higher gasoline and electricity prices. We expect inflation to temporarily stand above 3% in Sep-18 due to an unfavorable statistical base (Sep-17: -0.2% m/m), converging towards 2.7% by year-end afterwards. We hold our view that the BCCh will start the gradual normalization of monetary policy at the end of this year with the first 25bp rate hike in Dec-18.
- Volatile components continue to push inflation towards the 3.0% mark. The CPI rose 0.4% m/m in Jul-18 with the greatest variations coming from transportation (1.2% m/m), recreation (0.6%) and restaurants and hotels (0.5%). Specifically, the highest incidences were posted by bus fares, (0.089pp; +16.5% m/m), gasoline (0.04pp; 1.4% m/m), touristic package (0.04pp; 4.9% m/m) and electricity (0.034pp; 1.1% m/m). Accordingly, energy inflation sharply increased from 6.1% in Jun-18 to 8.4% y/y in Jul-18, also well above the Jan-18 print (3.0%). Likewise, we highlight that the housing group has advanced 70bp so far this year from 4.0% in Jan-18 to 4.7% currently. As for the touristic package behavior, previous methodology changes regarding its measurement continue to play a role.
- Conversely, core inflation and other components remain under control. The core inflation (CPIEFE, which excludes foods and energy) posted a variation of 0.3% m/m, similar to those observed in Mar-18, Apr-18 and May-18 but above Jun-18 (-0.1% m/m). With this result, the CPIEFE annual variation remained stable at 1.9%, suggesting still moderate pressures from the demand side. In fact, we highlight that services inflation, a gauge more related to domestic activity, increased just 10bp to 3.2% whereas non-tradable fell from 3.2% in Jun-18 to 3.1% in Jul-18. For their part, goods inflation went from 2.0% in Jun-18 to 2.1% currently, while tradables advanced 30bp to 2.3%, responding to a higher FX in both cases but remaining close to the floor of the BCCh target range.
- We maintain our view of the first rate hike from the BCCh in Dec-18. Despite the strong increase in inflation in the last two months (+70bp), we hold our opinion that the convergence towards the 3% threshold in a sustained manner will be a gradual process, which is based on the relatively stable behavior of core measures and ex-volatile components. As mentioned before, we expect inflation to temporarily stand above 3% in Sep-18 due to an unfavorable statistical base (Sep-17: -0.2% m/m), converging towards 2.7% by year-end afterwards. That said, the risks balance seems to be biased to the upside. This, together with the observed recovery of economic activity, allows to hold our expectation that the first rate hike from the BCCh will come in Dec-18 to 2.75%. Preliminarily, we anticipate that inflation will reach 0.2% m/m in Aug-18.
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