Inflation in Colombia: expectations compared to May data

Will inflation continue to fall in Colombia? The data published by the Administrative Department of Statistics (DANE) this Tuesday, June 11, will allow us to know what path the Consumer Price Index (CPI) will take.

So far, the downward trend has been clear. In April, inflation was 7.16% for its annual variation (that is, compared to the same month in 2023).

This meant a decrease of 5.66% compared to the figure recorded in April of last year, according to the information revealed by DANE. The entity maintains that this level has not been recorded since January 2022.

However, rents and electricity are two of the items that are putting the most pressure on the behavior of consumer prices in the country. And those are the ones that could end up stopping the decline.

What are the inflation projections?

With this clear outlook, Fedesarrollo analysts established that the CPI for May will be 7.14%, in a range between 7.05% and 7.18%. This would mean a slight reduction of 0.02% compared to April’s result.

An inflation of 7.14% for May is also the bet shown by the Monthly Expectations Survey of Economic Analysts (EME) of the Bank of the Republic. Although they also made a projection of the data without taking food into account and the result is a CPI of 7.79% for May and 5.8% for December of this year.

Now, the estimates made by Fedesarrollo and Banrep are also close with regard to the end of 2024. The former predict that in December inflation will close at 5.60% (increasing compared to 5.51% in April), in a range between 5.26% and 5.78%. The latter, for their part, point to 5.62%.

In any case, expectations remain outside the target range of the Bank of the Republic (2-4%).

Inflation not only affects the purchasing power of Colombians. Also an essential indicator for the central bank’s decisions regarding its monetary policy and interest rates.

“The only way to have low rates in a sustainable way is for inflation to be low and stable. Which means that it will converge to the 3% goal that Banrep has committed to,” said Leonardo Villar, manager of Banco de la República.

Although inflation has been reduced by more than six percentage points in the last year, Villar pointed out that it has done so more slowly than in other countries: “the Colombian economy stands out for being one of those that maintains the highest inflation among those that follow a target inflation policy.” Hence, “2024 will be the fourth consecutive year in which we do not meet the goal.”

What is the reason for the greater persistence of inflation? Villar highlighted five points:

1. The initial demand shock in 2021 and 2022 was stronger than in other countries.
2. The depreciation of the peso in those same years, something that did not happen in other countries on the same scale.
3. The growth in food prices since 2021 and which only began to reverse in 2023.
4. The necessary adjustments in fuel prices.
5. Price indexation that created additional pressures for minimum increases above inflation.