Chile's Inflation Hit's Zero Percent
economics | by Edward Hugh | 05 Mar, 2004 at 12:22 PM | comments (0) | trackback (0)

This is striking, isn't it. A Latin American country with zero inflation and a 1.75% funds rate which is under review for reduction. Of course a big part of this picture is currency-appreciation-driven, and the currency appreciation in turn is driven by China's demand for copper. So Chile's miraculous disinflation is fairly lop sided, but still. It remains a striking situation. Where it an isolated case, then perhaps we could shrug our shoulders and say, well, that's life, but it seems to me that what we are seeing is a huge global disinflatonary/deflationary process at work. And where it is leading isn't exactly clear.


Chile's annual inflation rate fell to zero for the first time since 1939 as companies such as General Electric Co. lowered prices following a 22 percent rally in the currency last year that made imports cheaper.

Consumer prices were unchanged in February from January -- after falling the four previous months -- and unchanged from February 2003, the National Statistics Institute said.

``We're passing on our lower costs,'' said Pablo Palavecino, manager of General Electric de Chile SA's appliance line in Santiago. ``Prices are a lot less.'' An imported refrigerator sells for 999,000 pesos ($1,655), down 17 percent from last year, he said.

Investors such as Andres Ergas at BanChile Administradora General de Fondos SA said the central bank will keep its benchmark lending rate at a record low of 1.75 percent at a policy meeting next week in a bid to prevent slowing inflation from turning into deflation. Central bankers have said they're concerned about deflation, which could slow the South American country's expansion by prompting consumers to delay spending on expectations that prices will keep declining.

Ergas said the lack of a pickup in inflation toward the central bank's target of an annual rate of between 2 percent and 4 percent would likely prompt policy makers to cut interest rates again.
Source: Bloomberg

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