The rise in Chilean inflation to 2.7% y/y in November is likely to be followed by a further increase to around 4.0% y/y early next year. That said, this increase will be temporary. As a result, we continue to anticipate 50bp of interest rate cuts towards the end of 2020.
Inflation set for a temporary spike, rate cuts still to come next year
- The rise in Chilean inflation to 2.7% y/y in November is likely to be followed by a further increase to around 4.0% y/y early next year. That said, this increase will be temporary. As a result, we continue to anticipate 50bp of interest rate cuts towards the end of 2020.
- Chile’s headline inflation reading was a touch above our own expectation for a pickup to 2.6% y/y, but just below the consensus expectations for a rise to 2.8% y/y. Inflation has picked up sharply from 2.1% in September. (See Chart 1.)
- A large part of the rise in inflation was caused by a pickup in food and household good’s inflation. Food inflation picked up from to 2.7% y/y in October to 3.7% y/y in November, and household goods inflation increased from 1.6% to 2.4%. (See Table 1.) This appears to be due to both currency pass through and reports of supply disruptions related to the protests.
- Meanwhile, transportation and health inflation also picked up modestly, while utility, education, restaurant and hotel price inflation fell. And core inflation also ticked down from 2.6% y/y to 2.5% y/y. Inflation in most other categories was broadly unchanged.
- We expect the recent weakness in the peso to push inflation up further, peaking at around 4.0% y/y in Q1 next year. This should prevent rate cuts over the next two quarters. But we think that a recovery in peso next year will result in sharp disinflationary pressures over the second half of next year, causing inflation to fall back to 2.0% by the end 2020. We continue to expect 50bp of rate cuts rate cuts towards the end of next year. This forecast is significantly more dovish than the market, which currently expects rates to end next year at 2.5%. (See here.)
Chart 1: Chile CPI (% y/y)
Sources: IBGE, Bloomberg
Table 1: Chile CPI (% y/y)
Food & Bev.
Sources: INE, Bloomberg
Quinn Markwith, Latin America Economist, +44 20 7808 4072, firstname.lastname@example.org