This year’s weakness
Q3 started out on a weak note. The July and August IMACEC readings were both well below consensus, while consumption-related indicators have remained broadly stagnant since the beginning of 2026. A significant part of the recent weakness has reflected temporary factors, particularly in mining, but higher labor costs and the negative income effect from higher international oil prices have added domestic drags on activity. This year’s weakness is particularly striking when we compare Chile’s performance with that of the rest of the world. We now forecast GDP growth at 0.3% in 2026. Our view of 2027 is somewhat less pessimistic, though this relative optimism rests upon several assumptions.
Labor market conditions deteriorated further in the June–August 2026 rolling quarter. Higher labor costs associated with successive minimum-wage increases, higher employer pension contributions and the statutory reduction in the work week have contributed to the deterioration in employment. Wage data were somewhat more favorable, but the broader income picture remains weak: the real wage bill has been virtually unchanged since December 2025, continuing to constrain household consumption.
The August CPI surprised sharply to the upside. Still, most of the increase was concentrated in only three volatile items. Core inflation measures showed much smaller changes than headline CPI, while services remain the main source of inflation persistence. The latest IPOM left the inflation trajectory broadly unchanged despite reporting both a more negative output gap and a lower oil price, as weaker demand pressures and lower energy costs are offset by higher labor costs. The course of international prices continues to be the main source of uncertainty about the inflation outlook.
The September IPOM reinforces our baseline projection of a prolonged hold of the TPM. Higher energy prices and higher labor costs continue to generate inflationary pressures, while weak domestic demand works in the opposite direction. Against this policy dilemma and the associated uncertainty, the board appears to be keeping its options open, rather than signaling a clear direction for the next policy move. Board minutes provide a somewhat more dovish signal, by indicating that the disinflationary effect of weaker domestic demand is already operating. Even so, the bar for moving the TPM remains high in either direction.
Chile’s first budget under President José Antonio Kast suggests a more pragmatic fiscal approach than his campaign rhetoric implied. Despite promises to shrink an inefficient state, Finance Minister Jorge Quiroz proposes modest spending growth, while redirecting resources toward the government’s priorities. Security, policing, prisons and migration enforcement receive substantial increases, along with public works projects, employment measures, housing subsidies, reconstruction and early childhood programs. Quiroz seems willing to use public investment to stimulate a weak economy. But more than 600 programs face review, and areas such as culture are to suffer cuts.
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