Chile: CPI surprises with decline of 0.2% m/m, inflation y/y down to 7.6%

• Core inflation flat m/m and eases to 9.1% y/y
• Diffusion index sits well below historical average for June
• CPI reading opens door for MPC to potentially start policy easing cycle with cuts of 75bps-100bps

Consumer prices declined by 0.2% m/m and increased by 7.6% in June, easing from 8.7% y/y in May, according to data released Fri. by the stats office INE. The June reading was lower than the consensus forecast +0.1% m/m and 7.9% y/y. This is now the second negative m/m inflation reading this year, and the y/y inflation rate went down for the eighth month in a row. Core inflation was 0.0% and 9.1% y/y.

The categories recording declining prices in m/m terms were clothing, transportation, housing, furniture, leisure, and communications. Contributing to this were declines of 1.9% m/m for energy prices, mainly gasoline and LPG.

Food and drinks inflation was 0.3% m/m and 11.8% y/y, with this being one of the few categories still showing double-digit inflation rates. This is mainly driven by a few goods in particular, such as meats, eggs, and some drinks, whereas fruits and vegetable prices are declining m/m since the start of the year.

The diffusion index for the CPI shows that only 43% of the basket had a positive variation in June. This is the first time this year that the share falls below 50%, and it was also below the historical average for the month of June.

Overall, this CPI inflation reading blows the door wide open for the Monetary Policy Council to begin its policy easing cycle in July and perhaps by moving faster than the 50bps cut expected by the consensus forecast. The headline inflation reading surprised on the downside and was negative, core inflation is going down more decisively, and the diffusion index for the CPI was below its historical average for June. On top of this, economic activity is flatlining following a mild recession and unemployment is on the rise. These conditions suggest the MPC may already be lagging to start the rate cut cycle, so even the council's conservative majority could opt to begin the cut cycle in July with 75bps. A cut of 100bps will be considered too, but it would be surprising if this is the preferred option. Even if the MPC wants to keep monetary policy tight, there is no reason to let the real monetary policy rate keep rising when CPI inflation is clearly on a downward trend and has taken a few big steps down from its 2022 peak.