Economic Indicator Briefing - Chile - Inflation

In December, consumer prices fell 0.30% over the previous month. The decline was less than the 0.46% price drop recorded in November and undershot market expectations, which had anticipated prices would fall 0.40%.
The monthly price drop was broad-based, although a sharp decline in prices for clothing and footwear was the main driver behind the December figure. Despite the monthly price fall, annual headline inflation jumped from minus 2.3% in November to minus 1.4%. Thus, annual inflation closed the year in negative territory for the first time in seven decades. The core inflation index, which excludes volatile categories such as oil, fresh fruits and vegetables, contrasted the developments seen in headline inflation and added 0.60% over the previous month. As a result, annual core inflation rose from minus 1.6% in November to minus 1.1%.

At its latest policy meeting on 15 December, the Central Bank decided to leave the benchmark interest rate unchanged at a historic low of 0.50% for the fifth consecutive month, in a decision expected by the market. Monetary authorities reiterated that given the current economic conditions, they intend to keep the policy rate at the current level until, at least, the second quarter of the year. The Central Bank has a medium-term inflation target of 3.0%, with a ±1% tolerance margin. However, in its quarterly inflation report published in mid-December, the Central Bank lowered its year-end 2010 inflation forecast to 2.5%, down from a previous estimate of 2.8%. In fact, monetary authorities do not expect inflation to reach the Bank's 3.0% target until the fourth quarter of 2011.

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