The days when the CPI is published are special for me. Not only because it is the projection to which we dedicate the most work, but also because it even changes the family dynamics. In case you don't know, most data in Chile is published at 8:30 in the case of the Central Bank, or at 9:00 in the case of INE. However, the CPI is published at 8:00, usually on the eighth day of each month. Therefore, everything starts earlier, the routine of getting the children up has to be adjusted and certain concessions have to be made regarding morning rituals. All this, in order to be doing F5 on the INE page to know the monthly variation.

Today was no exception, although with an important surprise. INE reported that the July CPI increased 0.8% over the previous month, which doubled market expectations. So did ours. Quickly, we start to review what happened, what we did wrong, if it was generalized or influenced by a couple of products, if there was any methodological modification, etc. The truth is that, in general terms, things went up more than we expected. There is no other explanation than that. We thought that fruits and vegetables were going to fall, but they went up slightly. We thought intercity bus increases were going to slow down, and they did not. We thought that higher vehicle imports would help curb the recent increases, and that didn't happen either. Sure, many of the things we projected did happen, but that's just for statistics and not to punish us so much, nothing more. "Zero point eight" may not seem so 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 inflations, therefore such a figure calls for concern.

In addition, we must consider that this increase has a context and a number of explanations, which not only define the recent increases, but could also influence the future. The year-on-year variation of the CPI reached 4.5%, which is high by our standards. If we remove fuel and other volatile items from the equation, the increase comes to 3.9% over twelve months. If we take this subset and only select goods (and discard services), the increase is 5.3%! Obviously there are some stock problems in specific sectors, the exchange rate has depreciated, the cost of shipping has skyrocketed and raw materials have risen. But we must also consider that households have much more liquidity than a year ago. Withdrawals from pension funds amount to US$50 billion, to which we must add the various state programs, which at the moment amount to approximately US$3 billion a month. That is a lot of money. In no way am I against helping families who have had a hard time in this pandemic, I am just saying that, as Friedman said, there are no free lunches 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 modifies family dynamics, and I am not talking about the one I described a while ago, but the one related to welfare. Inflation is a tax that mainly hits lower income people, diminishes our wealth and erodes the already convulsed social peace. This is how, for price stability, we have our Central Bank. It has already started a cycle of monetary normalization, raising the TPM by 25 basis points during its last meeting, which should continue given the background I have just referred to. Thus, it is quite likely that the TPM will end the year at 1.5% and that in early 2022 it will continue to increase. And with higher rates, economic dynamics also change, although we will devote another column to that.

Nathan Pincheira

Chief Economist of Fynsa