Chile Consumer Prices Rise More Than Forecast as Policymakers Hold Rate
(Bloomberg) -- Mexico’s and Chile’s consumer prices rose more than expected in July, according to reports published on Thursday, the latest sign that policymakers in both nations have limited room for new interest rate cuts.
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Mexico’s prices jumped 1.05% from June, above the 1.02% median estimate from analysts and the biggest monthly increase since November 2021. Annual inflation accelerated to 5.57%, according to the national statistics institute.
Chile’s cost-of-living rose 0.7% in the same period, above the 0.6% median forecast. Annual inflation in the chained series sped up to 4.6%.
Central bankers in both countries are grappling with annual inflation that’s speeding up further above their 3% targets. Chilean policymakers surprised most analysts on July 31 by pausing a yearlong easing cycle amid price threats such as rising energy tariffs. Investors are divided on whether Mexico will also hold rates or deliver a quarter-point cut in its decision later Thursday.
“The rise in Mexico’s headline inflation rate alongside the weakness in the peso means that Banxico’s interest rate decision later today will be a very close call between a cut and a hold,” Kimberley Sperrfechter, an emerging markets economist at Capital Economics, wrote in a research note Thursday.
In Mexico, fruit and vegetable costs ballooned by 8.87% on the month while agricultural goods rose by 5%. The report also showed new price pressures in segments including educational services and other services, according to Marco Oviedo, a strategist at XP Investimentos.
“I continue to expect an ‘on hold’ decision today, unless the Governor has something else in mind,” Oviedo wrote in a note.
Core inflation, which is closely watched by the central bank and excludes volatile items like fuel and food, slowed to 4.05% from 4.13% the prior month.
Chile Pressures
In Chile, overall housing and utility costs increased by 2.2% on the month in July, while energy prices jumped 2.5%, according to the statistics institute. On the other hand, alcoholic beverages and tobacco slipped by 0.2%.
What Bloomberg Economics Says
“Higher headline Chilean inflation in July signal regulatory changes will continue to pressure prices into next year. A pickup in the core suggests tradable goods inflation has bottomed, and peso depreciation and base effects will lift it ahead. Countering that, slower services inflation shows demand and cost pressures are abating.”
— Felipe Hernandez, Latin America economist
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The headline inflation rate will be lifted by 145 basis points over the next 12 months due to staggered hikes in electricity costs, which had been frozen since 2019, according to central bank estimates published in June. Consumer price rises won’t slow to target until early 2026, the monetary authority said.
Depreciated currencies are a concern in both countries. Mexico’s peso has tumbled 11.6% year-to-date, while Chile’s has lost 6.2% of its value during the period. A weaker exchange rate pressures inflation by raising import costs.
More broadly, Latin American central bankers’ growing caution on rate cuts contrasts with sentiment in the US, where the Federal Reserve is expected to kick off its own easing cycle in September with a drop of as big as half a point.
Brazil’s central bank said on Tuesday it won’t hesitate to raise rates as the inflation outlook worsens, marking a significant change in guidance barely a month after pausing a monetary easing cycle.
In a statement with last week’s rate decision, Chile central bank board members wrote that the bulk of borrowing cost cuts planned for 2024 had taken place in the first half of the year. The majority of Colombian policymakers rejected pressure for even faster easing at its decision the same day.
--With assistance from Giovanna Serafim, Alex Vasquez and Rafael Gayol.
(Recasts story to add information from Mexico)
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