Cheaper Clothing in Inflation Crisis Puzzles Economists in Chile

(Bloomberg) — A decade after complaints that Chile was underestimating inflation roiled markets and triggered a shake-up at the statistics agency, something still seems to be amiss in its calculation of consumer prices. That’s important in a country where about half of all Treasury bonds are index-linked.

Put simply, clothing costs are out of whack with other prices, falling 6.2% in the last four years, while the overall index has increased almost 30%, according to the statistics agency, or INE. And while no one is suggesting it’s deliberate manipulation, the disparity is all the stranger given that most clothing is imported, and the peso has weakened about 20% over that period.

Adding footwear smooths out some of the differences, but even then Chile stands in stark contrast with regional peer Mexico, where prices have risen, and most of the other 37 nations in the Organisation for Economic Co-operation and Development. Economists had expected the problem to be resolved in 2013 when INE overhauled its methodology, and again in 2019 when it re-based its figures. That doesn’t seem to have happened, though the contrast with other prices has eased.

“It has been a long-lasting, unsolved problem,” said Felipe Alarcon, chief economist at Euroamerica in Santiago. “The discrepancy in the data is significant, despite the fact that INE has repeatedly said that they have taken care of the issue.”

Asked about the concerns, INE highlighted that “annual variations have been contained” since the last changes in 2019 and that they were in line with international levels. The statistics agency also said many companies had cut prices during the pandemic to clear stock and that competition from stores’ own brands was further depressing prices.

Inflation in Chile slowed to 12.3% in January, with clothing costs, excluding footwear, dropping 3.8%. And while apparel makes up only 2.1% of the inflation index, significant errors in its calculation would mis-price index-linked bonds that make up more than 90% of corporate issues, and alter contracts in a country where everything from mortgages to school fees are linked to consumer prices.

Fashion Trends

Tracking the price of clothing is notoriously hard. Fashions come and go and items that were highly sought after one year are on sale the next.

But there are signs Chile is getting it wrong. When segregated by sub-division, the price of men’s clothing has fallen 9.3% since January 2019 and women’s clothing is down 21%. By contrast, school uniforms that are immune to the vagaries of fashion and much easier to measure, have gone up 32%.

Back in 2013, the head of INE resigned after staff joined economists such as Luis Arcentales of Morgan Stanley and Jorge Selaive, now at Scotiabank, to question the methodology for measuring inflation, and amid a scandal over the census. The resulting changes in methodology have improved the situation, according to Sergio Lehmann, chief economist at Banco de Credito e Inversiones in Santiago.

“Progress has been made in terms of clothing measures and others,” Lehmann said. “But it’s necessary to continue looking carefully at CPI components. Having the best formula possible to measure inflation is crucial given its impacts on monetary policy, expectations, financial markets and welfare.”

If INE were to consider a new change in the methodology, that would have an impact on the local bonds market, Alarcon said.

But after so many attempts at modifications, they have to be careful that “the remedy isn’t worse than the disease,” he said.

ECONOMIC CALENDAR:

Chile:
- Feb. 27: Jan. Unemployment rate
- Feb. 28: Jan. Copper, industrial, manufacturing production
- Feb. 28: Jan. Retail sales
- Mar. 1: Jan. Economic activity
International:
- US:
  - Feb. 27: Jan. Durable goods orders
  - Feb. 28: Feb. MNI Chicago PMI
  - Mar. 1: Feb. S&P Global manufacturing PMI
  - Mar. 1: Feb. ISM Manufacturing
- Eurozone:
  - Mar. 1: Feb. S&P Global manufacturing PMI
  - Mar. 2: Feb. CPI