Colombia inflation remains at just over 7% in June, central bank expects economy to pick up

SAO PAULO (ICIS)–Colombia’s annual rate of inflation stood in June at 7.18%, up very slightly from 7.16% in May, and the first increase in 15 months, according to the country’s statistical office DANE.

Monthly inflation stood in June at 0.32%, also a slight increase from May’s 0.30%.

Prices for the subgroup for utilities water, electricity, and gas as well as accommodation rose over the average (up 0.58%) as did health services (up 0.49%), in a country where private healthcare is the norm.

Restaurant and hotel prices also rose over the average, up 0.39% in June compared with May.

Prices for transport rose well below the monthly average with an increase of 0.19% compared with May, as some sub-components of that index such as gas fuel prices posted falls in prices.

Earlier in July, the central bank lowered rates for the fifth time since it started easing monetary policy in December, leaving the main rate at 11.25%, and said indicators were pointing to a stronger performance in coming month.

The petrochemicals-intensive manufacturing sectors, however, were in contraction in the second quarter and companies continue pointing to still-high interest rates as a drag for their growth as consumers stay away from big-ticket durable goods.

UPTICK, BUT FALLS TO CONTINUE
Despite June’s small uptick, analysts and Colombia’s central bank still expect inflation to continue falling towards the 3% target by 2025.

Gray columns: forecast according to analysts’ consensus
Source: DANE via Trading Economics. 

Colombia’s annual rate of inflation stayed stubbornly high for much of 2023, despite mediocre economic performance, and only started coming down in earnest this year; the country was well behind other Latin American economies in bringing down its rate of inflation.

In June 2023, the annual rate of inflation stood at 12.13%.

Due to the slower progress fighting off the inflation crisis caused by the post-pandemic logistical woes and the global energy crisis caused by Russia’s invasion of Ukraine, the country’s Banco de la Republica started easing monetary policy later than most peers in Latin America.

Since December, it has lowered interest rates five times; the current 11.25% rate compared to the peak at 13.25% for much of 2023.

Gray line: forecast
Source: Banco de la Republica de Colombia via Trading Economics

Industrialists and manufacturing companies point to high interest rates to the sector’s poor performance. Apart from a bright spell in the first quarter of this year, manufacturing has been in contraction for much of 2023 and the second quarter, as confirmed by the PMI index earlier in July.

Corporate Colombia also blames the left-leaning government of Gustavo Petro for some of the troubles, which include higher taxation to expand public spending in areas such public healthcare.

The cabinet has also tried to increase tax receipts from the polymers sector, implementing a Europe-type plastic tax which companies and trade groups representing them have vehemently opposed.

Financial analysts also think the government is too optimistic in its growth assumptions – and therefore those for tax receipts. Last week, US credit rating agency and analysts at Capital Economics both doubted the plans presented by the cabinet on fiscal consolidation were reachable.

In its last statement following its monetary policy committee meeting on 4 July, the central bank said second quarter’s indicators pointed to a potential stronger performance in coming months.

“The 0.9% annual GDP growth experienced in the first quarter exceeded the technical staff’s more conservative 0.3% forecast. During this period, net external demand was the primary driver of annual GDP growth due to the annual fall in imports and growth in exports. Second quarter results appear to point towards a recovery path for the economy,” said the bank.

“The country’s risk premium and the peso to US dollar exchange rate remained high over the past weeks mainly as a result of uncertainty regarding the inflation behavior in the US and [its central bank] the Federal Reserve’s management of the interest rate, placing pressure on international financial markets and contributing to the strengthening of the US dollar worldwide.”

On Petro’s cabinet fiscal consolidation plans, the central bank said it was pleased to see a “welcome public spending adjustment and commitment” to comply with the fiscal rules.

Focus article by Jonathan Lopez