Chile Inflation Measurements Called into Question
Are Chile inflation figures reliable? What could the 2012 census irregularities mean for the investor?
Outdated methodologies for Chile inflation figures have a real effect on government debt payments. Francisco Labbé’s resignation as the director of the National Institute of Statistics (NIS) has brought to the forefront the methodology for measuring consumer prices, ie inflation figures.
Currently, 60 percent of Chile’s public debt is inflation-adjusted. This means that as inflation increases so does the debt service on that debt. Chile is trying to get away from that type of financing. Just last fall they issued US$529-million in 30-year fixed-rate debt, but in developing, commodity-based economies investors worry about inflation affecting their total return.
We have seen what’s happened to copper in just the last month: from US$3.50 to as low as US$3.06 per pound.
So, when the government reports that inflation in March was 1.5 percent annualized, and others outside government feel that is was really 3.0 percent, we are talking about real money.
The NSI’s methodology came into question first in 2010 when clothing prices fell much faster than any other item. NSI employees started looking into ways to improve their calculations, even bringing in outside consultants. All of this was apparently rejected by Labbé, and even more so put into question the validity of the numbers.
We have seen this before in a more blatant example in Argentina. In 2007, President Nestor Kirchner replaced the personnel in the nation’s statistics agency to “improve operations”. The results were that inflation dropped from north of 20 percent to south of 10 percent virtually overnight.
It is estimated that 20 percent of Argentina’s US$37-billion of debt is in inflation-adjusted instruments, and from 2007 until last fall investors lost about US$7-billion in interest payments. This has prompted the International Monetary Fund (IMF) to threaten censure, as Argentina’s economic information is unreliable. The head of the IMF has termed it as giving Argentina a “red card”.
Chile’s Finance Minister Felipe Larraín Bascuñán said after Labbé’s resignation that the government is open to updated statistical methodologies, but asked for “responsibility” from those denouncing the agency.
The Chile Central Bank earlier this month reduced their inflation outlook for 2013 to 2.8 percent, in their target range between 2 and 3 percent. Governing member Enrique Marshal was quoted as saying that inflation was in a “trajectory of normalization”. Based on whose calculations?