The days when the CPI is released are special to me. Not only because it’s the forecast we put the most work into, but also because it even changes our family routine. In case you didn’t know, most data in Chile is released 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 released at 8:00 a.m., usually on the eighth of each month. As a result, everything starts earlier; we have to adjust our routine for waking up the kids, and we end up making certain concessions regarding our morning rituals. All so that, come the appointed hour, we can be hitting F5 on the INE website to find out the monthly change.

Today was no exception, though it came with a major surprise. The INE reported that July’s CPI rose 0.8% from the previous month, which was double market expectations—and ours as well. We quickly set out to review what happened, what we did wrong, whether the increase was widespread or driven by a couple of specific products, whether there were any methodological changes, and so on. The truth is that, generally speaking, prices rose more than we expected. There’s no other explanation than that. We thought fruit and vegetable prices would fall, but they rose slightly. We believed that increases in intercity bus fares would slow down, but they didn’t. We thought that higher vehicle imports would help curb recent price hikes, but that didn’t happen either. Of course, many of the things we projected did happen, but that’s just for the statistics—and so we don’t beat ourselves up too much—nothing more. “Zero point eight” may not seem like much, but thanks to the Central Bank’s work over the past 30 years, we’ve grown accustomed to low and relatively stable inflation; therefore, a figure like that is cause for concern.

Furthermore, we must consider that this increase has a context and countless explanations, which not only account for recent rises but could also influence the future. The year-over-year change in the CPI reached 4.5%, which is high by our standards. If we remove fuels and other volatile items from the equation, the increase stands at 3.9% over twelve months. If we take this subset and focus only on goods (excluding services), the increase is 5.3%! Clearly, there are some inventory issues in specific sectors; the exchange rate has depreciated; shipping costs have skyrocketed; and raw material prices have risen. But we must also consider that households have much more liquidity than they did a year ago. Withdrawals from pension funds 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. Under no circumstances am I against aid for families who have struggled during this pandemic; I’m simply saying that, as Friedman said, there’s no such thing as a free lunch, and the economy—that is, all of us—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 the kind I described a moment ago, but rather the kind related to well-being. Inflation is a tax that primarily hits lower-income individuals; it reduces our wealth and erodes the already fragile social peace. That is why we have our Central Bank to ensure price stability. The Central Bank has already begun a cycle of monetary normalization, raising the policy rate by 25 basis points at its last meeting, a trend that is likely to continue given the circumstances I just mentioned. As a result, it is quite likely that the TPM will end the year at 1.5% and continue to rise in early 2022. And with higher rates, economic dynamics also change, though we’ll devote another column to that topic.

Nathan Pincheira

Chief Economist at Fynsa