Chile's Inflation Rate Falls Below Expectations Ahead of Central Bank's Interest Rate Decision

(Bloomberg) — In a surprising turn of events, Chile's consumer prices increased by only 0.1% last month, falling short of analysts' forecasts and offering a glimmer of hope for the central bank as it prepares to potentially lower interest rates next week. This figure aligns with the lowest estimate from a Bloomberg survey, which had anticipated a median increase of 0.3%. According to the National Statistics Institute, annual inflation has dipped to 4.1% in the chained series, although it still exceeds the central bank's target of 3%.

Despite the positive news, central bankers, led by Rosanna Costa, are navigating through a series of electricity tariff hikes while loosening monetary policy in one of Latin America's wealthiest nations. The next increase in energy bills is set for October, which is expected to exert pressure on the local cost of living into early 2025. Consumer demand remains inconsistent, and key sectors such as real estate are struggling, contributing to a cooling of inflation.

"September's inflation figures indicate that price increases in Chile are slightly below the central bank's expectations, yet they align with forecasts predicting an acceleration in the fourth quarter and early next year. Core services inflation has remained persistent, while core goods inflation has accelerated this month. Regulatory changes are anticipated to raise electricity prices in October and January," stated an economic analyst.

In terms of specific price movements, food and non-alcoholic beverage prices fell by 0.5% during the month, while alcoholic beverages and tobacco saw a decline of 0.4%, and transportation costs dropped by 0.3%. Conversely, clothing prices surged by 3.3% in the same period. The central bank has indicated that borrowing costs are likely to decrease from the current rate of 5.5% towards a neutral level, as consumer price risks diminish. This neutral level is estimated to be between 3.5% and 4.5% by policymakers.

Finance Minister Mario Marcel has noted that lower gasoline prices and recent gains in the peso will mitigate the inflationary impact of rising electricity tariffs. A stronger currency is beneficial for the price outlook as it helps control import costs. Additionally, economic activity contracted by 0.2% in August due to declines in services and industry, which surprised analysts who had predicted a third consecutive monthly gain.

Economists and traders anticipate that the central bank will implement quarter-point rate cuts on October 17, followed by another reduction at the final policy meeting of the year in December. The central bank projects that annual inflation will conclude 2024 at 4.5% and ease to 3.6% by December of the following year, before reaching the target in early 2026, based on estimates released last month.