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Chilean Inflation Slows Slightly, Falling Short of Forecast as Peso Weakens

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Chilean Inflation Slows Less Than Expected as Peso Weakens

Chile's annual inflation rate for September showed a slight slowdown that was less than anticipated, primarily due to the continued depreciation of the peso. This development raises concerns about renewed price pressures as the central bank reduces its benchmark interest rate. Consumer prices rose 5.1% compared to the previous year, slightly above the median estimate of 5% from analysts. Monthly inflation stood at 0.7%, according to the national statistics institute. A closely-watched price gauge, which excludes volatile items, increased by 6.6% over the course of 12 months and rose 0.2% from August. As inflation slows towards the 3% target and domestic activity becomes increasingly fragile, Chilean central bankers, led by Rosanna Costa, are implementing looser monetary policies. However, the weakening peso has made imports more expensive, limiting policymakers' flexibility. Food and non-alcoholic beverages experienced a 1% increase in prices, with potato prices surging by 37.7% due to floods, while bread prices rose by 1.6%. Transportation prices also saw a 1.2% gain, driven by a 3.1% increase in gasoline prices. Conversely, alcoholic beverages declined by 0.9%, and healthcare costs ticked down by 0.3%. Economists, including Felipe Hernandez from Bloomberg Economics, expect the inflation rate to continue falling amid weak activity and domestic demand. Top economic authorities in Chile project annual inflation to be around 4% by December. However, the recent depreciation of the peso may reverse some of the positive effects observed in August's price-growth slowdown. The Chilean central bank has already reduced borrowing costs, and economists predict further rate cuts in the coming year.

Implications of Chile's Inflation Trends for New Businesses

Chile's recent inflation trends, characterized by a slower-than-expected slowdown and a depreciating peso, could have significant implications for new businesses in the country. The central bank's decision to reduce its benchmark interest rate in response to these trends may create an uncertain business environment.

Price Pressures and Business Costs

The depreciation of the peso has led to increased import costs, which could translate into higher operational expenses for businesses reliant on imported goods or services. This, coupled with the rise in consumer prices, may put pressure on profit margins, particularly for businesses in the food, beverage, and transportation sectors where prices have seen notable increases.

Monetary Policy and Investment Decisions

The central bank's looser monetary policy, while aimed at curbing inflation and bolstering domestic activity, could also affect business investment decisions. The prospect of further rate cuts may influence borrowing and investment strategies, with businesses needing to consider the potential impact on their financial planning and risk management.
Future Inflation Expectations
While economists project a continued fall in the inflation rate, the potential reversal of positive effects from the peso's depreciation poses a challenge. New businesses must therefore remain vigilant of economic forecasts and adjust their strategies accordingly to navigate the dynamic Chilean economic landscape.
Story First Published at: https://financialpost.com/pmn/business-pmn/chile-inflation-slows-less-than-forecast-as-peso-gets-weaker
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