Market Outlook

Chile Inflation ‘Running Wild’ as Prices Unexpectedly Surge

(Bloomberg) — Chile’s consumer prices rose at more than twice the pace analysts expected last month, suggesting the central bank will continue with its aggressive monetary tightening cycle after lifting its key rate by the most in over 20 years in January.

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Prices leaped 1.2% in January, above the 0.5% median estimate of analysts in a Bloomberg survey. The annual inflation rate unexpectedly climbed to 7.7%, rising for the 11th consecutive month, the national statistics institute reported on Tuesday.

The figures provide more bad news for policy makers who have raised borrowing costs by 500 basis points to 5.5% since July, with no sign inflation will return to the 3% target any time soon. Strong consumer spending and higher commodity costs are keeping prices under pressure. Outgoing Finance Minister Rodrigo Cerda said in an interview last week that cost-of-living increases will slow later this year.

“Inflation pressures are running wild,” Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, wrote in a report. “The central bank likely will continue to withdraw monetary support,” raising the key rate to at least 7%.

Read more: Chile Signals Tax Rise to Cope With Growing ‘Social Pressures’

Five-year interest rate swaps surged 45 basis points in morning trading as investors weighed odds of more aggressive borrowing cost hikes. Chile’s peso rose 0.5% following the inflation report, the biggest gain among 24 emerging market currencies tracked by Bloomberg. Yields for the nominal Treasury bond due in 2026 increased 33 basis points.

What Bloomberg Economics Says

“Higher-than-expected Chilean inflation in January points to lingering pressure from supply shocks, strong domestic demand and accumulated currency depreciation. It adds evidence that earlier gains are spilling over to prices of other goods and services. The surprise is likely to push up inflation expectations.”

–Felipe Hernandez, Latin America economist

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Food Costs

Consumer prices climbed across the board in January, with the cost of food and non-alcoholic beverages leaping 1.6%, the biggest increase for that month since at least 2010, according to the statistics institute. Transportation costs leaped 2.8%.

“The underlying trend in food inflation is rising rapidly,” Abadia said.

Chile’s central bank surprised financial markets by raising rates by 150 basis points on Jan. 26. In an accompanying statement, policy makers wrote that recent activity data has been above forecasts and there are significant inflationary risks.

Last week, outgoing President Sebastian Pinera tapped Rosanna Costa as Chile’s first-ever female central bank chief. Costa, who has been a bank board member since 2017, is expected to forge ahead with borrowing cost hikes.

(Adds market move in fifth paragraph, analyst comment in sixth)

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