“Inflation was low thanks to the decline in flights to Alaska and Caribbean cruises”, wrote an auditor while I was being interviewed on the radio to discuss the February CPI. While it’s clear that this is a caricature and not entirely false, I think it’s important to explain, first, how the CPI is calculated and, second, how much of an impact certain specific products have.

The CPI consists of 303 goods and services that reflect the consumption habits of Chileans. Recognizing that these habits are dynamic, the basket is updated every five years and is constructed based on the Family Budget Survey, which is conducted by the Central Bank, which is then adjusted using data from the National Accounts (since some consumption is underreported, especially for alcoholic beverages and tobacco). For a product to be included in the CPI basket, it must meet a series of methodological requirements, the two most important being that it must be included in household expenditures of at least four of the five income quintiles of the population and that it account for at least 0.02% of the annual budget. I find this extremely relevant, because sometimes the impression is given that the basket represents only the consumption of a few people or specific groups, which is clearly not the case. 

Is the CPI basket the same as my consumption basket? Or yours? Probably not, which is perfectly fine, because it’s not this statistician’s job to show whether my or your monthly spending has increased or not, but rather that of the average Chilean. Some will spend more on food, others more on travel, others more on fuel, and so on—which doesn’t mean the data is “misleading.” In fact, if you wanted to, all the information is available to construct your own CPIby adjusting the weightings to better match your budget. In fact, this is done to construct other underlying indices or, as in our case, to develop measurements of trends in the basic basket of goods, high-demand goods, and so on.

So, with that clarification out of the way, let’s move on to the figure at the center of the controversy. The CPI for February rose 0.3% compared to January, which came in below expectations, which had been as high as 0.8%. However, this figure does not break the inflationary trend of recent months, as has been suggested. You don’t have to dig very deep to find the reasons: the combined negative impact of package tours (-0.364 pp) and airfare (-0.181 pp) accounts for more than -0.5 pp of the final result. In other words, based on a very rough calculation (and by no means a counterfactual), without these fluctuations the total index would have risen 0.7% m/m. In fact, when we look at the CPI excluding volatile items, we see that it did indeed rise by 0.7% m/m, bringing it to 6.5% compared to the same period last year. Additionally, one indicator that has been quite useful in illustrating these inflationary pressures is the diffusion index, which this time reached 64%. As in the previous month, this is the highest level for any February since 2009.

If we add to the above mix the increases in commodity prices that have resulted, in part, Russia’s invasion of Ukraine, things don’t improve substantially. In fact, just due to the rise in oil prices (up to US$120), we have raised our inflation forecast for December by 0.8 percentage points (to 7.0% y/y), to which further adjustments could be added due to both this factor and food prices. For March, we project a 1.0% m/m increase, driven mainly by changes in the Education and Food categories. 

Therefore, even though the figure might seem low, it is not what it seems. As we have said on several occasions, a more in-depth analysis is necessary when drawing conclusions as significant as the ones that were intended to be drawn. Inflation has not subsided and requires every effort of our institutions to bring it under control, a task that falls not only to the Central Bank but also to the newly inaugurated administration. 

Nathan Pincheira 

Chief Economist at Fynsa