The days when the CPI is published are special for me. Not only because it is the projection we devote the most work to, but also because it even changes the family dynamic. In case you don't know, most data in Chile is published at 8:30 a.m. in the case of the Central Bank, or at 9:00 a.m. in the case of the INE. However, the CPI is published at 8:00 a.m., usually on the eighth day of each month. Therefore, everything starts earlier, we have to adjust the routine of getting the children up, and certain concessions are made with regard to morning rituals. All so that, at the appointed time, we can hit F5 on the INE website to find out the monthly variation.

Today was no exception, although there was a significant surprise. The INE reported that the CPI for July rose 0.8% compared to the previous month, which doubled market expectations. Ours too. We quickly set about reviewing what happened, what we did wrong, whether it was widespread or influenced by a couple of products, whether there had been any methodological changes, etc. The truth is that, in general terms, things rose more than we expected. There is no other explanation for it. We thought that fruits and vegetables would fall, but they rose slightly. We believed that intercity bus fare increases would slow down, but they did not. We believed that increased vehicle imports would help slow recent increases, but that did not happen either. Of course, many of the things we projected did happen, but that is only for statistical purposes and so as not to punish ourselves too much, nothing more. "Zero point eight" may not seem like much, but thanks to the work of the Central Bank over the last 30 years, we have become accustomed to low and not so volatile inflation, so a figure like this is cause for concern.

Furthermore, it must be considered that this increase has a context and countless explanations, which not only define recent rises but could also influence the future. The year-on-year variation in the CPI reached 4.5%, which is high by our standards. If we remove fuels and other volatile elements from the equation, the increase reaches 3.9% in twelve months. If we take this subset and only select goods (and discard services), the increase is 5.3%! Clearly, there are some stock issues in specific sectors, the exchange rate has depreciated, the cost of maritime transport has skyrocketed, and raw materials have risen. But we must also consider that households have much more liquidity than a year ago. Pension fund withdrawals total US$50 billion, to which we must add the various government programs, which currently amount to approximately US$3 billion per month. That's a lot of money. I am not against helping families who have suffered during this pandemic, but I am saying that, as Friedman said, there is no such thing as a free lunch, and the economy (i.e., everyone) is adjusting to the new conditions. One of those adjustments, in the short term, is prices.

And that inflation also changes family dynamics, and I'm not talking about what I described a moment ago, but rather that related to well-being. Inflation is a tax that mainly hits people with lower incomes, diminishes our wealth, and erodes the already turbulent social peace. That is why we have our Central Bank to ensure price stability. It has already begun a cycle of monetary normalization, raising the MPR by 25 basis points during its last meeting, which should continue given the background I just referred to. It is therefore quite likely that the MPR will end the year at 1.5% and continue to rise in early 2022. And with higher rates, economic dynamics also change, although we will devote another column to that.

Nathan Pincheira

Chief Economist at Fynsa