Headline inflation has evolved in line with forecasts and has continued to fall, along with inflation expectations which remain aligned with the 3% target for the next two years. However, the core inflation (which excludes volatile items) has exceeded expectations, influenced by stronger domestic spending and high cost pressures. Compared to the projections in the June Monetary Policy Report (IPoM), both consumption and investment have performed better in recent months, while the impact of the temporary factors that boosted activity early this year has dissipated, as was indicated at the time. Externally, the market outlook for the Federal Reserve’s (Fed) monetary policy has become more expansionary, which has favored the evolution of short-term financial conditions. In any case, the risks of an abrupt deterioration in these conditions persist. In the central scenario, projections for domestic demand growth are increasing, especially for this year. Upward adjustments are also being made to GDP, although by a lower magnitude. Regarding inflation, the core component is estimated to reach higher levels than those projected in June between the end of this year and the first part of the next year. Headline inflation is expected to converge to 3% during the third quarter of 2026. The Board will evaluate the next movements of the Monetary Policy Rate (MPR) being attentive to the evolution of the macroeconomic scenario and its implications for inflation convergence. In the current conditions, the risk of greater inflation persistence calls for gathering more information before continuing the process of leading the MPR to converge to its neutral range.

Headline inflation has evolved as forecast in the June IPoM’s central scenario. The annual change of the total CPI was 4% in August (4.4% in May), with two-year inflation expectations still aligned with the 3% target.

However, this trajectory combines mixed results from its components, most notably core inflation being above expectations. The latter reached 3.9% annually in August (3.6% in May), with greater increases recorded in both goods and services (figure 1).

Core inflation has risen in the context of stronger domestic spending, high wage pressures, and a weaker exchange rate. All these factors raise the projection for this inflation measurement between the end of this year and the first part of the next year.

Activity has behaved as anticipated, which ratifies the transitory nature of the factors that boosted it at the beginning of the year. Thus, in the second quarter, total GDP grew by 0.4% quarterly in its seasonally adjusted series (0.8% in the first quarter) (figure 2).

Nevertheless, domestic demand has performed better than expected. It is worth noting the acceleration of investment in the second quarter. This was particularly noticeable in the machinery & equipment component of gross fixed capital formation (GFCF), whose dynamism has reportedly continued so far in the third quarter, according to figures for capital goods imports. The construction & other works component of GFCF has continued to recover gradually. The upturn in investment has been largely supported by the push for large-scale projects, coupled with somewhat more favorable financial conditions and improved business confidence compared to previous years (figure 3).

Private consumption also grew more than expected, but its difference with the June projection was smaller than that of investment. This advance is occurring alongside a favorable evolution of some of its fundamentals. Thus, it can be seen that labor income (i.e., the real wage bill) has continued to rise, albeit at a slower pace than in previous months. Its composition reveals a contrast between low job creation and a sharp increase in wages. The financial situation of households has improved compared to previous years, due to both lower interest rates and a reduced financial burden. In any case, consumer bank loans remain sluggish. Finally, consumer expectations are also showing a gradual upturn (figure 4).

In this context, the current account deficit accumulated over the last twelve months went from 1.8% to 2,2% of GDP between the first and second quarters of this year. This was influenced by a stronger growth in imports of goods due to the increase in domestic spending —which has focused on its tradable component— in addition to a slowdown in exports in recent months.

The external scenario continues to be marked by several sources of uncertainty. Although the global impact of tariffs has been limited so far, their evolution is uncertain and the economic effects are still estimated to be negative. Beyond the agreements reached, the average U.S. tariff is slightly above 15%, its highest since the 1940s (figure 5). Added to this is the concern generated by institutional tensions in that country. Meanwhile, announcements of a significant increase in defense spending, especially in NATO countries, have contributed, on the one hand, to marginally raising growth projections in some economies and, on the other, to increasing fiscal risks.

The U.S. government’s announced tariffs have affected the timing of trade flows and activity in major economies. The anticipated imports prior to the actual application of tariffs contributed to the slowdown in the United States in the first half of the year. This has been mirrored by a greater boost to exports in China and the Eurozone, which recorded better-than-expected results and were also driven by higher fiscal spending (figure 6). These advances in trade between countries have made it difficult to gauge the impact that the trade conflict will have on the global economy in the quarters ahead.

As for global inflation, there are early signs of the impact of the tariff policy, especially in the United States. The latest U.S. CPI data showed an increase in inflation for the goods most exposed to tariffs, although this was offset by falls in the prices of other items in the basket. In other countries, no repercussions have been observed, although several of them anticipate that trade diversions could cause some downward pressure on inflation.

In the international financial markets, short-term interest rates have fallen amid expectations that the Fed will resume its rate cuts shortly. However, upside risks to inflation in the United States maintain the uncertainty regarding the future dynamics of this process. Tariff adjustments, the prospect of a larger fiscal deficit, and rising labor costs in the American economy are raising concerns about the future evolution of inflation, as evidenced by short-term inflation expectations. In such context, the yield curve of U.S. interest rates has been steepening.

Compared with the statistical cut-off of the last IPoM, stock markets have seen widespread highs, including in Chile (IPSA), while currencies exhibit mixed movements. In any case, the dollar remains depreciated globally. The Chilean peso has accumulated a depreciation of around 3% against the dollar and around 3.5% compared to a broader basket of currencies (MER).

Projections

The main adjustments to the central scenario are at the local level, with changes in the projections for domestic demand and core inflation being most noteworthy. In both cases, these revisions are influenced by the higher starting point left by recent months’ figures. The spending trajectory is revised upward, especially for 2025. This, coupled with the influence of a number of cost factors, will lead to high inflationary pressures in the coming quarters.

Thus, the outlook for GFCF is revised upward once more. The latest survey by the Capital Goods Corporation again raised the investment amounts for major projects planned for 2025-2028, especially in energy. This couples with the already mentioned dynamism of capital goods imports. In the central scenario, GFCF would show variation rates of 5.5% in 2025, 4.3% in 2026, and 3.1% in 2027 (3.7, 3.6, and 3.3% in June, respectively).

The foreseen expansion of private consumption is also raised, although to a lesser extent than the GFCF. For this year, this is largely explained by the improved actual results for the second quarter. Going forward, the pace of consumption growth is not expected to differ significantly from the June forecast, considering the mixed evolution of its fundamentals. Private consumption is expected to grow by 2.7% in 2025, 2.3% in 2026, and 2.1% in 2027, respectively (2.2% this year and 2% the next two in the June IPoM) (figure 7).

Consistently with the higher expenditure on tradable goods, a larger current account deficit is foreseen for the three-year period 2025-2027. As a share of GDP, this deficit is expected to average around 2.5% in said period (1.9% in the last IPoM).

For activity, GDP growth ranges are revised moderately. For 2025, the lower bound of the range forecast in June is raised to 2.25%-2.75%. For 2026, it is adjusted up to 1.75%-2.75% (1.5%-2.5% in June) and is maintained at 1.5%-2.5% for 2027.

On the fiscal front, for 2025 the central scenario incorporates an increase in spending in accordance with the latest Public Finance Report (IFP). Afterwards, committed expenditures are considered.

Between late 2025 and the first part of 2026, core inflation would exceed the June forecast. This estimate factors in the greater effective variation of recent months, the effect of higher private spending, still high wage pressures, and a more depreciated real exchange rate (RER) than forecast in the previous IPoM. During 2026, annual inflation minus volatile items would decline toward 3%, in a scenario where the activity gap would close, private consumption would grow in line with the economy’s trend, and inflation persistence would behave according to usual patterns. This also considers the assumption that the RER will appreciate over the projection horizon.

In this scenario, the convergence of headline inflation to the 3% target would occur during the third quarter of 2026. From then onwards, it would hover around this figure (figure 8).

For the external scenario, the growth prospects of trading partners remain slightly above 2.5% on average for the period 2025-2027. Although negative effects from the trade conflict are still expected, the evolution of financial conditions in the short term, improved expectations among different agents, and higher fiscal spending expected in a number of economies would sustain global activity. For the terms of trade, the projection of US$4.3 for a pound of copper in the period 2025-2027 remains unchanged. For a barrel of oil (average WTI-Brent price), the estimate of close to US$65 on average for the same period is maintained.

Monetary policy

In the central scenario, the foreseen path of headline inflation is similar to that of the previous report, but with core inflation expected to be higher over the next twelve months than what was projected in June. Since this CPI component tends to be more persistent, this emphasizes the need for close monitoring of its evolution and its fundamentals.

The Board will evaluate the next movements of the MPR being attentive to the evolution of the macroeconomic scenario and its implications for inflation convergence. In the current conditions, the risk of greater inflation persistence calls for gathering more information before continuing the process of leading the MPR to converge to its neutral range.

The sensitivity scenario for the upper bound of the MPR corridor is linked to the local economy, particularly the performance of spending. A situation in which activity and domestic demand were more dynamic than expected would reinforce agents’ expectations and give an additional boost to spending, in a context in which nominal wages continue to grow above historical averages. All of this would result in increased inflationary pressures.

The lower bound depicts a situation in which the external outlook worsens, with negative effects on the global and local economies. An escalation of trade tensions or a deterioration in global financial conditions cannot be ruled out, with interest rate hikes, stock market declines, and currency depreciation in emerging economies. All of this would negatively affect economic expectations and domestic spending, with a significant reduction in inflationary pressures.

The risk scenarios are still associated with external conditions and cover several sources of tension. The reversal of global financial conditions continues to pose a significant risk. Although indicators of global uncertainty have fallen from the highs of previous months, they remain above the levels of the last decade, and abrupt adjustments of risk premiums by financial markets cannot be ruled out. This could be exacerbated by the deterioration of the fiscal situation in several major economies and fragile global geopolitical issues, including, among other factors, the ongoing trade disputes and the persistence of conflicts and hotspots of military tension.