Chile quells inflation better than the other four large regional economies

Of the five large Latin American economies, Chili has been the one that has recorded the best inflation figures, going in a year and a half from registering 14.1% in August 2022, its highest in three decades, to closing 2023 at 3.9%.

They are followed by Brazil and Mexico, both with a Consumer Price Index (CPI) as of December of 4.6%; Colombia, with 9.2%; and, very far away, Argentina, with a historic 211.4%.

“We closed the year with a figure below all expectations, including those of the Central Bank itself. I don’t remember anyone who has been forecasting a CPI for December of less than 4%“said the Chilean minister, Mario Marcel, last week after learning about the closure of 2023 and the 0.5% month-on-month drop in prices in December, the largest in six years.

In its latest report, the Chilean Central Bank estimated that inflation will reach the 3% target in the second half of the year, but, based on the latest data, the date could be brought forward.

The containment of inflation was one of the indicators used by The Economist to recently position Chile as the seventh best performing economy among the countries of the Organization for Economic Cooperation and Development (OECD) in 2023.

“Perfect storm”

The independence and solidity of the Chilean issuer’s performance and the drastic 23.1% reduction in public spending in 2022 are the keys that, according to experts consulted by EFE, explain the successful fall in inflation in the world’s leading copper producer.

“Chile managed to make a fairly important fiscal adjustment in 2022, which obviously generated less pressure on aggregate demand. This joins the aggressive increase in interest rates that the Central Bank began to apply in mid-2021″Juan Ortiz, senior economist at the Economic Context Observatory of the Diego Portales University (UDP), told EFE.

The monetary policy rate (MPR), the reference interest rate, was at the historical maximum of 11.25% for several months, but the issuer began to lower it in July 2023 and is currently at 8.25%.

Unlike other countries in the region, Ortiz added, Chile has an element in its favor and that is that ““The market trusts in the role of its Central Bank” and in its independence to “maintain low, predictable inflation with little volatility.”

Marcela Vera, an economist at the University of Chile, reminded EFE that during the pandemic there was a “Perfect storm” that triggered inflation, leading it to end 2022 at 12.8%.

The more than US$80,000 million in economic aid provided by the Government to alleviate the impact of the crisis, as well as the massive withdrawals from pension funds, which involved a disbursement of US$55,000 million, considerably boosted consumption and triggered inflation. .

“Inflation is not a typical imbalance in the economic structure of Chile due fundamentally to the fact that the country produces food – one of the divisions with the greatest impact on the CPI – and that in recent decades we have not had episodes of great expansion of domestic demand. and fiscal spending, except for the pandemic“Vera noted.

Accelerate the rate cut?

Once inflation is controlled, Chile’s great challenge for 2024 is to grow again: last year it registered zero growth and for this year international organizations and the Government itself estimate a GDP expansion of between 2% and 2.5%.

For Francisco Castañeda, director of the Business School of the Universidad Mayor, this is something that will be difficult to achieve with such high interest rates: “The MPR has not fallen fast enough”.

Chile, he told EFE, is facing the “typical macroeconomic dilemma”: high rates quickly contain prices on the one hand, but “sacrifice economic growth in the short term”.

The market anticipates that the issuer will raise the reference interest to 7.5% in January and 4.5% in 12 months.

Ortiz, from the UDP, is more cautious and believes that we still have to wait for “inflationary normalization is consolidated” before quickly lowering rates.