Chile: Inflation Fighters Take A Break For Now

Chile's economy continues to recover at a modest pace from last year's recession. Relatively weak demand has allowed the central bank to take a break from inflation-fighting. But for how long?

At its July 11 policy meeting, the Central Bank of Chile left its target rate at 5.5%, after hiking rates by a quarter-point twice so far this year. The bank said Chile showed no serious signs of inflation right now.

Higher fuel prices, however, are lifting Chilean inflation. Consumer prices in June were up 3.7% from a year ago, the highest inflation rate in a year (chart). And as the recovery spreads, Chilean businesses may have more pricing power even though the 1999 recession created pockets of overcapacity.

Real gross domestic product fell 1.1% in 1999, but the economy is expected to grow by 5.5% to 6% this year. Much of the growth, though, is coming from a surge in exports, which are rising, thanks to stronger global growth and a very weak peso. Domestic demand, which had jumped in the first quarter, slowed dramatically in the second quarter, at least as indicated by weak retail sales data. Industrial production increased a surprisingly strong 11.3% in May compared with a year ago, but shipments were up only 3%. Again, the output rebound can be traced to a surge in foreign demand. Chile's trade surplus widened again in early June, helped by rising copper exports.

Chile: Inflation-Fighters Take a Break--for Now

Looking ahead, domestic spending may get a lift from the gradual improvement in the labor markets. Employment is picking up after job losses during the recession. The unadjusted unemployment rate, which hit 11.5% in August, 1999, fell to 8% in February, only to edge up to 8.9% in May because of seasonal factors.

However, pay gains remain very small. Collective bargaining settlements called for real wage gains of only 0.55% last year. Private economists expect real wages to rise only 2% in 2000. In 2001, pay raises in Chile may be larger as the economy continues to expand and labor market tightens.

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