Chile - Economic Briefing November 2004

Government Wins Municipal Elections (continued)

Headline inflation rises but core inflation drops
In October, consumer prices increased 0.29%, which was just a notch above market expectations of 0.26% but well above the 0.05% increase observed in September.  Higher transportation prices accounted for the lion share of the October price increase. Partly offset by lower prices for housing.   As a result of the October price increase, annual headline inflation increased from 1.5% in September to 1.9%.  The core inflation index, which excludes volatile categories such as oil, fresh fruits and vegetables, remained virtually unchanged in October (-0.01%), which prompted a decline in the annual rate from 1.1% in September to 0.9%.  Price increases, thus, seem to be well short of the latest Central Bank projection in the Monetary Policy Report from September, which has headline inflation at 2.9% at the end of 2004 and core inflation at 1.8%.  However, it only takes monthly price increases of less than 0.2% for the remaining two months of the year to lift the current rate of 1.9% to 2.9%.  Consensus Forecasts expect less pressure on the price level towards the end of the year but have hiked their December 2004 inflation forecast from 2.6% expected last month to 2.7%.  For next year, the Consensus Forecast for headline inflation is a notch above the Central Bank’s 2.8% estimate.

Government coalitions wins municipal elections
In nationwide municipal elections held on 31 October, Chileans elected city council members in 345 communities and for the first time, in a separate vote, directly elected the city mayors.  While the outcome of the municipal elections will have no direct impact on national politics, they are seen as a crucial test ahead of next year's presidential race.  The government Concertación coalition that has won every local, congressional and presidential election and has ruled the country since the return to democracy had a net gain of 38 mayoralties, winning 44.8% of the votes cast for mayor and 48.0% of the votes cast for council members.  The centre-left Concertación alliance includes the Christian Democratic Party (PDC, Partido Demócrata Cristiano); the Socialist Party (PS, Partido Socialista); the Party for Democracy (PPD, Partido por la Democracia); and the Radical Social Democratic Party (PRSD, Partido Radical Social-Demócrata).  The opposition right-wing coalition “Alliance for Chile”, comprised of the Independent Democratic Union Party (UDI, Unión Demócrata Independiente) and National Renovation (RN, Renovación Nacional), garnered 38.7% of the votes for mayor and 37.7% of the city council votes.  While the Alliance fared worse than expected, it was able to retain the mayoralty in Santiago, where UDI’s Raúl Alcaíno succeeded Joaquín Lavín, who will lead the Alliance into next year’s presidential elections.  Lavín will now have to cope with increased pressure from the Alliance’s more moderate party, the RN, for a greater voice in how the opposition develops its political strategy and to move closer to the political centre, as the preparations for the 2005 presidential race begin.