Upside risks to Chile's inflation increased as peso depreciates

Chile's consumer price inflation increased sharply to 4.4% in June from 4.0% in May, after falling for seven consecutive months, as core inflation rose to 5.4% in June from 5.0%. Inflation acceleration was not broad-based (actually, it was primarily driven by stronger inflation in housing - and related spending categories - and health) and there appears to be some sign that it was driven by the base effect, said Societe Generale in a report on Tuesday. 

However, the fact that it coincides with a sharp depreciation of the peso - more than 15% yoy through June (3.3% in the month of June alone) - and given the strong pass-through, the upside risk to inflation has risen. The bank observes, on average, the current rate of peso depreciation is consistent with consumer inflation of between 4.5 and 5.0%. 

"Therefore, despite the possibility that inflation may not accelerate further, the upside risks to the full-year inflation forecasts have risen considerably. Assuming peso depreciation remains contained for the remainder of the year, we will likely see inflation moderating below 3.5% towards the yearend", says Societe Genrale.