As expected, headline inflation has risen rapidly, driven by the significant cost shock resulting from the conflict in the Middle East. Meanwhile, during the first quarter, domestic demand evolved in line with forecasts, while economic activity surprised negatively, largely associated with the performance of sectors linked to natural resources. On the external front, the rise in oil prices caused an increase in inflation in several economies. Global activity remains resilient, partly supported by technology breakthroughs, which have sustained favorable financial conditions. In this context, projections for the 2026–2028 period are made limited adjustments. The GDP growth forecast for 2026 is reduced, mainly due to incoming first-quarter figures. In contrast, a higher growth range is anticipated for 2027, driven in part by stronger investment momentum. Regarding domestic demand, no significant revisions are observed on aggregate, although changes in its composition are considered, mostly this year. In particular, public spending is projected to gain momentum, while household consumption is expected to lose traction, as its underlying fundamentals have weakened. Investment forecasts for this year have also been revised downward, because of lower-than-expected actual figures; however, the medium-term outlook has improved. Forecasts for inflation continue to assume that the annual change in the CPI will resume levels around 3% during the second quarter of 2027. The Board estimates that the balance of risks to inflation has been shifting gradually toward equilibrium, although the macroeconomic outlook remains subject to a higher-than-usual degree of uncertainty. Accordingly, the future path of the monetary policy rate (MPR) will be assessed on a meeting-by-meeting basis, based on how events unfold.

As expected, inflation has risen rapidly in recent months, driven by the significant cost shock caused by the tensions in the Middle East. The year-on-year change in the overall CPI rose to 3.9% in May (2.4% in February), mainly reflecting the higher fuel prices. This pushed inflation of the volatile component up to 5.1% annually last May.

So far, inflation dynamics have evolved in line with expectations, with the pass-through of the shock to other prices consistent with historical averages. This is reflected in the 3.2% annual variation of core CPI, in line with the March forecast (Figure 1). In any case, while the risks to inflation have been balanced, they remain relevant and should be carefully monitored.

Activity contracted in the first quarter, with worse-than-expected results, explained largely by the performance of sectors associated with natural resources. The decline in copper mining stood out, linked to lower ore grades and downtime at some sites. This was compounded by the downturn in the agricultural-forestry and fishing sectors, which affected other industries through supply chains. Construction and some service sectors also underperformed (Figure 2). In April, sectors linked to natural resources continued to dampen economic activity. However, historical data and other indicators point to a reversal of these effects during the second half of the year, except in mining, where they are expected to be more persistent. The nature of these shocks and their limited spillover to the rest of the economy suggest temporary adjustments to potential output and limited effects on the output gap.

Aggregate domestic spending was in line with forecasts in the first quarter (Figure 3). In any case, differences were observed in their composition. Private consumption kept growing at a similar pace to that of the previous period (1% quarterly, seasonally adjusted), while public consumption posted a strong rebound. Meanwhile, gross fixed capital formation (GFCF) weakened, particularly the machinery and equipment component, a trend that continued in the data released for the second quarter. Construction and other works performed below projections, remaining virtually stagnant, and continuing to be affected primarily by the housing segment.

Several private consumption fundamentals have shown a less favorable evolution since the last IPoM. In the labor market, the unemployment rate has risen, while various indicators point to weak job creation and a shift from formal to informal employment (Figure 4). At the same time, the external shock has reduced the year-on-year change in real wages—due to the rapid rise in inflation—and has negatively affected consumer expectations (Figure 5). In this context, April’s economic activity data showed reduced momentum in sectors linked to private consumption.

For this year, the public spending estimate is higher than that of the previous IPoM, which included all the cuts stipulated in the government’s March communication. The change also includes recognition of higher committed expenditures for 2026, in line with what was reported in the latest Public Finances Report (IFP). Thus, consistent with the information in that Report, this IPoM’s fiscal spending assumption is 1.2 percentage points of GDP higher than projected in March.

Externally, as well as in Chile, inflation has been pushed up by the effects of the oil price hikes. With significant fluctuations, prices remained above $90 per barrel in the weeks leading up to the statistical cutoff of June 10. Until that date, futures contracts continued to point to a decline in prices, although these remained at levels higher than those seen before the conflict broke out (Figure 6).

World activity has increased in line with expectations. The dynamism of tech sectors in several countries continues to bolster financial conditions, investment, and economic activity. However, there is heterogeneity in this area, as the economies most deeply involved in developing new technologies—primarily the United States and some Asian countries—have benefited more than the rest (Figure 7).

Growing concerns about inflation, against a backdrop of resilient economic activity, have led to a more hawkish monetary policy outlook across a group of economies. Most central banks remain cautious ahead of their upcoming decisions, and several are highlighting the upside inflationary risks. The United States stands out, where incoming economic data has reinforced expectations of Fed funds rate hikes, in addition to the European Central Bank’s increase in its benchmark interest rate at its June meeting (Figure 8).

In this scenario, global financial conditions continue to show volatility. Compared to the previous IPoM, riskier assets have rebounded, particularly in the tech sectors, while the global dollar remains stable. Long-term interest rates have continued to rise in major economies, reflecting changes in inflation and monetary policy outlooks, as well as growing fiscal imbalances. At home, the peso and the IPSA show no significant changes when comparing the statistical cutoffs of this IPoM and the last (Figure 9).

Projections

On the external front, the oil price trajectory is slightly moved up from the March forecast. Based on futures prices for the ten days prior to the statistical cutoff date —June 10, the price per barrel (WTI-Brent average) is projected to stand at US$90 in 2026, US$78 in 2027, and US$74 in 2028. On average, these figures are around 4.5% higher than those in the March IPoM.

As long as the global supply of oil remains restricted, scenarios of even more extreme increases in the price of oil could occur. The use of oil inventories to compensate for lower global supply has reduced their availability and, therefore, their ability to mitigate the impact on prices. This opens the possibility of scenarios in which oil prices exhibit more extreme spikes, with even stronger effects on global inflation. In any case, should this situation arise, it would also have a contractionary effect on global economic activity through a deterioration in earnings, expectations, and financial conditions.

The copper price projections are raised for the period 2026-2028, while for world activity they remain similar to those in the previous IPoM. The former is consistent with higher trading prices and robust global demand, underpinned by increased defense spending, energy transition, and investment in new technologies. Prices are foreseen at US$5.8, US$5.2, and US$5 in 2026, 2027, and 2028, respectively (US$5.4, US$5.1, and US$5 in March) (Figure 10). Meanwhile, projections again anticipate GDP growth of 2.8% for Chile’s trading partners over the 2026–2028 three-year period.

Locally, projections maintain a similar trajectory for consumption, although with changes in its composition. For private consumption, the growth rates foreseen in 2026 and 2027 have been revised downward, in line with changes in their fundamentals. The opposite is true for public consumption, whose growth in 2026 is higher than projected in March, in tune with the new fiscal projections. For 2027 and 2028, the committed public spending included in the latest IFP is considered.

The GFCF growth estimate is revised downward for this year. This is influenced by the negative surprise in the first quarter and the less favorable trend in recent available data. With this, the projection has been revised down from 4% in March to 2.2% in this IPoM.

However, the medium-term investment outlook has continued to improve. The latest survey from the Capital Goods Corporation raised the projected investment amounts for large-scale projects for the 2026–2029 period by 33%. One factor behind this increase is the sustained high price of copper, along with financial conditions that have remained essentially unchanged in recent months. In this context, investment growth is foreseen at 5% in 2027 (3.2% in March) and 3.2% in 2028 (2.8% in March) (Figure 11).

The growth range foreseen in 2026 is lowered to 1.0-1.75% (1.5-2.5% in March), a revision that is largely explained by the negative surprise of the first quarter. Worth noting in this change is the contraction projected for the mining industry. For 2027, the range is raised to 2.0–3.0% (1.5–2.5% in March), driven partly by stronger investment performance. For 2028, the range is adjusted to 1.75–2.75% (1.5–2.5% in March) (Figure 12).

Regarding headline inflation, as in March, it is still projected to return to values close to 3% in the second quarter of 2027. Inflation is expected to be slightly higher by the end of this year than was expected in March, mainly due to the changed assumption about oil prices.

There are no changes in core inflation. The spillover of the cost shock to other prices in the economy has been in line with expectations, and the assumption remains that it will follow typical patterns. In any case, monitoring this assumption remains important. Inflationary pressures from spending have not changed substantially, with public and private spending outlook adjustments moving in opposite directions. The projection assumes that the real exchange rate will remain around its long-term level and evolve in line with the March forecast (Figure 13).

Market inflation expectations are consistent with this scenario. For the short term, annual inflation is expected to be slightly above 4% for a few quarters. Over the next one to two years, it would stand around 3%.

After the statistical cutoff of this report, the signing of an agreement between the United States and Iran was announced, to be finalized on Friday, June 19. Global financial markets reacted positively to the announcement, with stock market gains, lower interest rates, and a global depreciation of the dollar. Regarding commodity prices, the decrease in oil prices stood out. These fell back to levels slightly below US$80 per barrel (WTI-Brent average), representing declines of slightly more than 10% in the short-term price. Looking two years ahead, the trajectory of futures contracts shows a price approximately 3% lower than that considered in the central scenario.

However, the conflict has been marked by constant back-and-forth negotiations to reach a peace agreement. For this reason, it is necessary to continue monitoring the course of events and assessing their impact on the inflation outlook.

Monetary policy

The Board estimates that the balance of risks to inflation has been shifting gradually toward equilibrium, although the macroeconomic outlook remains subject to a higher-than-usual degree of uncertainty. The conflict in the Middle East has not been definitively resolved, and global oil supply has not returned to normal. At the same time, while economic activity has been affected mainly by temporary supply-side factors and the outlook for demand has not changed significantly, several household consumption fundamentals have performed less favorably.

Accordingly, the future path of the monetary policy rate will be assessed on a meeting-by-meeting basis, based on how events unfold. The Board reaffirms that it will make every decision necessary to meet its objective of bringing projected inflation to 3% over a two-year horizon.

In terms of the MPR corridor, its lower and upper bounds are defined by similar scenarios to those considered in March. The lower one reflects a sharper deterioration of domestic demand. This could result from a further weakening of the labor market, as well as of household and business expectations. This would ease medium-term inflationary pressures, calling for a lower MPR over the projection horizon.

The upper bound reflects a situation where inflation is higher and more persistent than estimated, which could be the case if the cost shock and/or its spillover exceeds expectations. This could occur in a scenario where both the Chilean and the global economies are more dynamic, thus amplifying the second-round effects of the cost shock beyond expectations and reinforcing the mechanisms driving inflationary persistence. In such case, a more contractionary MPR would be necessary to ensure the convergence of inflation to the target.