(Bloomberg) -- Chile’s annual inflation slowed more than forecast in May on falling transportation costs, stoking bets that the central bank will lower its interest rate from an over two-decade high as soon as next month.

Consumer prices increased 8.7% from a year prior, less than the 8.9% median forecast of analysts in a Bloomberg survey. Monthly inflation stood at 0.1%, the national statistics institute reported on Thursday. A closely-watched price gauge that excludes volatile items rose 9.9% in 12 months and 0.5% from April. Chile’s central bank targets inflation of 3%.

Chile’s central bank is seen inching toward the start of an easing cycle as headline inflation falls back from last year’s high above 14% and economic activity stagnates. Policymakers led by Rosanna Costa have remained cautious, arguing that core price readings have been slow to ease. Still, traders surveyed by the monetary authority see rate cuts starting in July.

Read more: Chile’s Central Bank Says Local Inflation Woes Remain Unresolved

Short-term swap yields, an indication of future interest rates, extended their recent declines after the report, with the one-year tenor dropping 15.5 basis points. The two-year tenor fell to the lowest level since January.

Transportation costs slid 1% in May on declines in the cost of both urban and air transit, according to the report. Communications prices slipped by 0.2%.

On the other hand, the biggest upward price drivers include a 0.8% jump in restaurant and hotel costs and a 0.7% gain in household items. 

Central bankers are getting control of inflation that was driven initially by over $50 billion in early pension fund withdrawals and public transfers that reached 90% of households during the pandemic. Russia’s invasion of Ukraine and the subsequent commodity cost surge in 2022 came as an additional shock.

In the minutes to their May policy meeting published last week, central bankers said there’s no evidence the domestic inflation slowdown has been consolidated even as data moves in the right direction. 

The central bank’s economic activity index, a proxy for gross domestic product, was unchanged in April from the month earlier, the monetary authority reported on June 1. Commerce declined by 2.4%, while services slipped 0.4%, offsetting a jump in mining.

--With assistance from Giovanna Serafim and Rafael Gayol.

(Updates with details from the release starting in the fifth paragraph)

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