Chile Prices Rise More Than Forecast as Rate Cuts Start Anew

Matthew Malinowski
·3-min read

(Bloomberg) -- Chile’s consumer prices rose slightly more than forecast last month as the central bank stares down uncertainty over near-term inflationary pressures and prepares new interest rate reductions.

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Prices increased 0.3% from July, more than the 0.2% median estimate of analysts in a Bloomberg survey. The annual inflation rate ticked up to 4.7% in the chained series, above the 3% target and the fastest pace since November, the National Statistics Institute reported on Friday.

Central bankers led by Rosanna Costa restarted their easing cycle on Tuesday, delivering a quarter-point cut to 5.5% and signaling rates are on track to hit a neutral level in the second quarter next year. Their view is supported by a shaky economy, with gross domestic product shrinking 0.6% last quarter. On the other hand, the nation is bracing for another electricity tariff hike in October, and some economists warn that policymakers need to keep their guard up.

What Bloomberg Economics Says

“We think uncertainty is high and price gains could accelerate further. Faster core goods inflation in August signals upward pressure from accumulated peso depreciation. The uptick in core services inflation indicates little relief from weaker domestic demand and greater economic slack. Higher electricity tariffs in October and January will push up the headline and imply upward pressure from price indexation to a higher base.”

— Felipe Hernandez, Latin America economist

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The cost of food and non-alcoholic beverages rose 0.5% in August and housing increased 0.4%, together representing the top monthly inflation drivers, according to the statistics agency. On the other hand, transportation costs slipped 0.1%.

2024 Inflation

Earlier this year, Chile central bankers sounded the alarm after Congress backed a series of hikes to electricity tariffs that had been frozen since 2019.

Energy prices jumped 2.5% in July, when the first increase took effect, before ticking up just 0.1% in August. With the next rise set for October, central bankers surprised some analysts with dovish guidance at Tuesday’s rate decision, saying that borrowing costs will fall faster than previously thought.

The next day, policymakers raised their 2024 year-end inflation estimate to 4.5%. Costa later told reporters that annual inflation will peak in early 2025 and then slow steadily toward target, hitting the 3% goal in early 2026.

Chile’s economic activity jumped more than expected in July, providing some good news after GDP contracted in the second quarter. Still, the central bank’s Costa said that increase was driven in part by temporary factors, and Finance Minister Mario Marcel warned that figures for both August and September will be weaker.

Central bank surveys of traders and economists show inflation estimates at 3% in two years, which is the time-frame for monetary policy. Those anchored forecasts, together with weakness in local spending, reduce the risk of persistent consumer-price growth, policymakers wrote on Tuesday.

Put together, Friday’s inflation reading supports the central bank’s decision to relax monetary policy this week, with tight financial conditions and weakening domestic demand helping tame price pressures, according to Andres Abadia, chief Latin America economist at Pantheon Macroeconomics.

“We expect the impact of higher electricity prices to keep headline inflation around current levels, averaging 4.5% over the next few months,” he wrote on Friday. “Looking ahead to 2025, disinflation is likely to resume by mid-Q1, gradually moving toward the 3% target by late Q4.”

(Updates with economist comments and analysis starting in fourth paragraph)

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