Inflation in Colombia surprises and falls to 4.82% in June

Inflation in Colombia continues its slow slide toward the 3% target. The National Administrative Department of Statistics reported Monday afternoon that inflation in June had a 0.10% variation, reaching its annual reading of 4.82%. The deputy director of the official agency noted with a certain degree of relief, during the data presentation, that the country had broken the psychological threshold of 5%. After a laborious nine-month process of skating in the same zone, it has finally dropped another step in a long stretch that has been going on since March 2023. At that time, the cost of living peaked at 13.3%. The economy was overheated. Colombians emerged from the pandemic to spend. And, by decision of the Bank of the Republic, a crusade against the rise had to be undertaken.

“When we look at the result closest to this 4.82%,” explained DANE Deputy Director Andrea Ramírez Pisco, “we see that the last lower record observed was in October 2021, at 4.58%.” According to the official, the roller coaster of changes in the indicators of some components that previously exerted pressure has been normalizing. The needle's movements are no longer as abrupt. For example, food and energy prices seem to be starting to stabilize: “Food and non-alcoholic beverages even have a negative variation of 0.8%, which is mainly due to a decrease in potatoes .”

Thus, Colombia continues its slow economic recovery process. Some fiscal indicators still call for restraint, and other international fluctuations could impact the process. It's worth remembering that the Bank of the Republic , responsible for monetary policy in Colombia, has set its final inflation target at 3%. To do so, it has replicated a formula used by other central banks around the world: raising benchmark interest rates. This has restricted Colombians' access to credit and other financial products for months.

A recipe for cooling the economy has led to heated debates with the Ministry of Finance. The Executive Branch has criticized the slow pace with which the bank's board of directors, where the finance minister sits, has cut the rate from 13.25% in June 2023 to the current 9.25%. The government has firmly argued that the policy has been restrictive and has harmed the evolution and growth of the Colombian economy. In its view, the slide should be faster in order to stimulate activity.

In any case, the results show that annual inflation fell 0.23% compared to May (5.05%). Compared to the same month last year, the drop is more than two basis points, from 7.18% to 4.82%. These results have exceeded the expectations of most financial institutions and analysts. On average, bettors predicted the index would fall to 4.91%. Hope now centers on the Bank of the Republic easing rates slightly to boost domestic demand, which in Colombia has led growth in the first quarter of this year with 2.7%.

Now, the annual contribution by sector was led by the Education component with a 7.56% increase, followed by Restaurants and Hotels (7.44%), Transportation (5.25%), and Accommodations (5.23%). That's the long-range view. The cumulative picture is the big picture. However, when zooming in on the factors that influenced that 0.10% monthly increase, the contributions shrink: Restaurants and Hotels (0.05%), Transportation (0.03%), Goods and Services (0.01%), and Household Goods and Services (0.01%). These are only moderate increases that invite optimism.

At this point, it's worth remembering that the latest projections from the Bank of the Republic suggest that the year-on-year inflation rate will close the year at 4.4%. For the second year in a row, the country would miss its target. Likewise, Itaú Colombia is not declaring victory and is pushing the inflation rate back to 5.1% for December: "Despite the favorable data for June, the disinflationary process is expected to undergo annual revisions in the second half of the year, leading to a downward comparison," a spokesperson for the bank states. In the short term, she adds, the dynamics are likely to create room for easing the cycle of interest rate cuts, and the Bank of the Republic will moderate rates to 8.50 by the end of 2025.

“The only thing that increased slightly in June was transportation, which went from a negative contribution of 0.01% last month to a positive contribution of 0.03% this month,” explained the DANE deputy director. The official attributed this change to the two long weekends in June: “Especially the San Pedro holiday, which usually sees a lot of tourist activity. And, indeed, it had an impact on both air and intercity transportation costs.” What were the components that, on the other hand, decreased? Along with food and alcoholic beverages, lodging, water, and electricity, which in other months boosted results, have all gone negative this time.