More than half a century with UF

On June 24, the value of the UF exceeded $33,000. A year ago, its value reached $29,700. According to the inflation projections that emerge from the Central Bank’s survey of economic expectations, in just over a year it will exceed $35,000. Undoubtedly, a substantial increase, considering that the low inflation rates in the last decade had been reflected in a slower growth of its value.
This year UF turned 55 years old. It was introduced in January 1967, with a value of 100 escudos, which was initially readjusted on a quarterly basis. In 1977 the daily adjustment mechanism was introduced according to the variation of the CPI (in force until today).
The UF is a unit of account that incorporates an automatic indexing mechanism, this means that its value changes as inflation changes. As a paper by Luis Oscar Herrera and Rodrigo Valdés shows, the use of indexation mechanisms in Chile predates UF and its introduction was motivated by the need to protect savers from the loss of value of their deposits as a result of price level increases, a particularly serious problem given the high inflation rates of the sixties.
The UF has been fundamental in allowing the growth of the financial market in Chile, without the UF it would be difficult to have developed a mortgage market with long-term loans like the one that exists today in Chile. As José Pablo Arellano, former Director of Budgets, points out, the UF is an “insurance against inflation, which has more importance and value the higher and more variable inflation and the longer the horizon of contracts.”
It also has costs. The main problem of UF is the inflationary inertia it generates. Indeed, the existence of a large number of contracts indexed to the UF, such as mortgage loans or insurance policies, leads to a rise in inflation in one month being reflected almost immediately in the prices of these products in the following month, reinforcing the initial effect.
The increases in the value of uf in the last year have revived proposals for its elimination. Such a measure would have little or no impact, we would simply observe its replacement by other indexation mechanisms and a lower level of protection for savers and for those who receive payments a UF as in the case of pensioners for scheduled retirement and annuity. After all, the rise in UF and the costs it generates are nothing more than the reflection of the problem of origin, the increase in inflation. Killing the messenger does not solve the problem.

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Original source in Spanish