Inflation in Chile falls more than expected in December; cut is expected

The Consumer Price Index (CPI) Chili registered a surprising decrease of 0.5% last December, placing interannual inflation at 3.9%, the National Institute of Statistics (INE) reported this Monday.

According to the report published by the organization, “The decreases in food and non-alcoholic beverages and in recreation and culture stood out, and the increase in restaurants and hotels”.

“Ten of the twelve divisions that make up the CPI basket contributed negative impacts on the monthly variation of the index, one had a positive impact and one had zero impact.”, detailed the INE.

The figure was particularly surprising since in November the interannual index marked 4.8%, so for this month 4.5% was expected during the same period.

In food, the most significant falls were in vegetables, legumes and tubers (-4.3%), as well as dairy products, cheeses and eggs (-1.5%).

Specifically, potatoes, which had experienced sustained increases in recent times, showed a monthly decrease of 16%, although in the accumulated figure for the year it presented a variation of 73.8%.

The Chilean economy recovered faster than expected after the pandemic, with a historic increase of 11.7% in 2021, but in 2022 it began to slow down and closed with a growth of 2.4%.

The economic aid provided by the Government to alleviate the impact of the crisis, as well as early withdrawals from pension funds, considerably boosted consumption and triggered inflation, to which were added the effects of the war in Ukraine.

After an aggressive rate increase to contain runaway inflation, which led the benchmark interest rate to remain at the all-time high of 11.25% for several months, the Chilean Central Bank began reducing interest rates last July.

Chile closed 2022 with an annual inflation of 12.8%, the highest since 1991, but it has been moderating this year and in October it registered a monthly variation of 0.5% and a two-month increase of 5%, the lowest since August 2021 Both the Central Bank and different international organizations expect that the 3% goal will be reached during the second half of next year.

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Chile’s consumer prices fell more than expected in December, supporting the central bank’s guidance for another sharp interest rate cut later this month.

The 0.5% drop last month is higher than all estimates in a Bloomberg survey, where the median forecast pointed to a drop of just 0.1%. A key price indicator that excludes volatile items rose 5.4% in the 12 months through December, up from 6% the previous month.

The Central Bank of Chile has signaled that it will announce another big rate cut at its meeting on January 31, as monetary policymakers estimate that inflation will approach the 3% target.

Although the cost of living had risen much more than expected in November, board members attributed the surprise to certain volatile elements. More broadly, they are being helped by weak demand and monetary conditions that remain tight.

The annual inflation rate has now fallen more than ten percentage points from the three-decade high of 14.1% recorded in August 2022. That drop has paved the way for an easing cycle that has so far reduced the key rate to 11.25 % to 8.25%.

Chile was one of the first Latin American nations to reverse the aggressive increases in borrowing costs implemented in the wake of the pandemic. Last month, Colombia announced its first rate cut since 2020 and Mexico is expected to do the same between the first and second quarters.

Chile’s gross domestic product will likely remain unchanged in 2023 amid declining demand and investment, according to central bank projections released last month. Monetary policymakers project the economy will expand up to 2.25% this year.

With information from EFE and Bloomberg