Chile inflation moderation stops for now, unlikely to return to target in 2016

A fresh round of substantial peso depreciation halted inflation's brief phase of moderation and it is now rising once again. The pace is expected to stay unchanged in September at 5.0% yoy (actually a rise from 4.99% to 5.05% yoy) even though core inflation probably fell slightly to 5.62% yoy after touching the 15 February high of 5.67% yoy in August. 

Moreover, given the prospect of further pressure on the currency, inflation could stay near 5.0% this year and then by moderate, albeit less than previously expected, in 2016. Also, the labour market has been tighter than expected, despite below-trend growth for some time now. 

"We have revised up our inflation forecasts to 4.4% and 3.6% for 2015 and 2016 from 3.8% and 3.1%", notes Societe Generale.

Given the significant pass-through from currency depreciation and the stronger-than-expected labour market, the central bank probably does not see inflation moderating to its target during the policy horizon despite significantly weaker economic growth. The downside risks to the inflation forecasts relate to additional growth weakness leading to a deterioration in the labour market and wages.