The Unidad de Fomento, popularly known as UF by its initials, was unavoidable news on September 9, when it exceeded $ 30,000 for the first time. And among so many headlines it came to the mailbox of our Answerdog, from WatchDog AGENDA, the next question: what is the UF for?
The $ 30,000 milestone and the projections that it will continue to rise as future inflation does, installed the issue of its validity and the direct effects that the UF has on people’s lives.
This monetary unit varies according to the rise or fall of the Consumer Price Index (CPI), which monthly reports the National Institute of Statistics (INE). Its existence allows to preserve the purchasing power of the money involved in many salaries, loans, credits, investments, savings and other financial operations.
As in the last 12 months, inflation reflected from the CPI accumulates an increase of 4.8%, and the forecasts are for it to accumulate an annual increase of 5.7% as of December, its growth has been greater compared to previous years, in which inflation rose between 2% and 3%.
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The liquidity provided by the savings that were in the AFPs contribute to phenomena that affect the purchasing power of families and their access to credit.
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The UF was created in Chile 54 years ago during the government of President Eduardo Frei Montalva, in order to help Chileans have a certain stabilization of prices, since in those times there were annual increases in inflation close to 30%.
“In the year 67 the idea of creating a kind of currency that is protected from inflation arises, so that people can make long-term contracts with greater certainty”, he comments on his origins the economist and executive director of the Center for Financial Studies of the ESE Business School of the Universidad de los Andes, Cecilia Cifuentes.
The UF allows the economy to coexist with inflation. An example of this is how the UF protects savings: when they are denominated in this unit, they do not lose purchasing power, but are readjusted in real terms (which means that they do so in line with inflation).
Let’s look at an example. The purchasing power of $ 1 million in 2010 is greater than that of $ 1 million in 2021. But if one had 1,000 UF saved in 2010, its real value is the same in 2021.
With pensions, like annuities, something similar happens. “Being in UF they automatically make people feel safe against any inflationary phenomenon, because the silver they receive is automatically readjusted”, explains the economist Erik Haindl. Thus, if the CPI rises 0.4%, this does not mean that the retiree will lose purchasing power, but rather that the amount they receive in pesos will be 0.4% higher.
Those who receive income from the rental of a house or an apartment can also benefit if the contract is made in UF. Not so the landlord, who as the UF rises must pay a higher monthly payment in pesos.
“If you take out the UF from one day to the next and prohibit it, the interest rate you would have to pay would be much higher than the one we pay today, because it would have to compensate for the greater risk associated with inflation that, in some years, It could be higher than expected, “explains the economist and former Under Secretary of the Economy. Tomás Flores.
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Inflation and external shocks have hit workers’ wages, according to research by two economic historians. The analysis spans from 1886 to now.
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As we saw with the rental example, the UF always has two sides: there are investors who benefit from it when inflation is high and others whose debt increases sharply. That is precisely what has happened in recent months, when the extremely high liquidity in the market – a product of the aid programs and measures to alleviate the crisis – and the low rates have encouraged inflation.
“The problem is that if they have to pay the tuition fees, they go up by the UF, the rents go up by the UF, dividends go up by the UF,” says Cifuentes.
Those who have applied for mortgage or consumer loans have witnessed this phenomenon: the value of the installment has been rising as the UF grows, precisely because inflation increases. And although they will always maintain the same value of the dividend or quota expressed in UF, each month or year it will cost them more to pay it in pesos.
Despite this, experts agree that the UF should not be eliminated because it is a good system to incentivize the capital market in the face of possible inflationary changes. In addition, Cecilia Cifuentes explains that if it were eliminated, institutions such as banks would seek other forms of protection against inflation, such as higher interest rates, since in this way they would ensure not to lose capital, which means that fewer Chileans would have access to these loans. .
With the UF, Chile has managed to set capital market prices, something that no other country does. Also, elsewhere the dollar is used to hedge against inflation. According to Cifuentes, this system is more unstable because it adjusts to the value of the dollar in the world economy, instead of being coupled to the cost of living in Chile. “There are times that the dollar in a month can go up 5%. The UF will never go up 5% in a month, unless it has an inflation of 5% per month and we are very far from that.”
“If the UF disappeared in Chile, mortgage loans would remain in dollars. In Peru and Argentina this is how they defend themselves from domestic inflation. So the problem is that when the dollar shoots up, people go bankrupt. Imagine that someone sold their house in dollars instead of UF, it would be crazy, “says Haindl.
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Factchecking
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