Chile's inflation moderation continues, albeit at a slowing pace

The recent depreciation of the Chilean peso cannot be seen as threatening enough for current levels of inflation (headline and core), it could probably affect the extent of inflation deceleration that we expect for the remainder of this year. 

In June, headline inflation likely moderated by one tick to 3.9% while core inflation remained largely unchanged at 5.0% yoy, forecasts Societe Generale. Given the relatively stubborn trajectory of core inflation, relatively better-than-expected shape of the labour market (and the wages) and the renewed pressure on peso, some upside risk is seen to full year headline and core inflation forecasts of 3.8% and 4.7%. 

While headline inflation is expected to stay above 3% until the end of the year, core inflation could stay above 3.5% over the next 12 months, added Societe Generale. However, unless the CLP depreciates significantly, it is unlikely to keep inflation above 4% over the medium term, the upper bound in the BCCh's target range.

The downside risks to the forecasts relate to further weakness in the economy leading to the deterioration in the labour market. For now, therefore, growth remains the key concern for monetary policy.