Inflation continues its decline, but experts do not declare victory

In his most recent public statements, the face of the Minister of Finance, Ricardo Bonilla, has shown firmness and optimism in equal parts.

His tone gains strength, especially when he addresses the issue of the decline in inflation and the urgency of accelerating the downward cycle of interest rates to give more respite to families and companies.

That task falls on the Bank of the Republic, and despite the fact that the cost of living has been falling for 9 consecutive months, reaching 8.35% year-on-year this January, experts are still cautious and far from claiming victory in the long road towards the objective of reaching 3% set by the central bank.

The horizon is still cloudy.

For Jorge Restrepo, economist and professor at the Javeriana University, we are still “far from a normal routine adjustment to prices in Colombia.”

In his opinion, citizens are losing purchasing capacity across the board with special emphasis on the “working population”: “Although it is good news that inflation is going down, we have a price level that severely affects the well-being of the Colombian population.” and particularly of the poorest.”

When is inflation no longer considered to be at a “high” level?

Munir Jalil, PhD in Economics from the University of California, is cautious.

“I would say that when this downward trend in inflation is fixed, this convergence towards the level set as a goal of 3%, that is when we will be able to say that there will be some tranquility.”

The vast majority of analysts have projected annual rates for the end of the year that range between 5% and 6%.

The Bank of the Republic has suggested that the goal could be reached by the end of this year.

Other analysts maintain that it will be at some point in the next.

None of the above clouds the effort in the monetary policy orientation promoted by the Bank of the Republic.

Among other reasons, because the recipe to cool an overheated economy like the Colombian one after the pandemic does not offer many more alternatives and a good part of the world has followed the same script.

It is enough to remember that although the Colombian central bank has maintained 3% as a magic figure, other entities such as the US Federal Reserve aim for 2% as a final goal, as does the Bank of Japan, which in other times has lowered the bar at an average slightly above 0%.

“There is no exact consensus on what the inflation rate should be,” explains Adrián Garlati, director of the Economics program at Javeriana: “typically central banks try to ensure that it is not double digits or even close to them.

The reason is that from there on up, financing problems, price distortions begin, and people do not know exactly how much things are worth because prices fluctuate too much and erode purchasing power.”

Jorge Restrepo explains that the percentage depends a lot on each country: “A rate of 2%, 3%, at most 4% is reasonable in terms of natural adjustments in an economy.”

In the same way, he emphasizes that “the important thing is to be within that range or close to it.

And I say important because those who benefit are above all the poorest people.”

Except for the extreme cases of Argentina (211.4%) and Venezuela (193%), Colombia is the only large Latin American economy with the accumulated rate above 5%.

Leaving aside the intervention times of the Bank of the Republic, which after the pandemic undertook the adjustment of rates with some delay, the three internal factors that have exerted the most pressure are the price of food and a gallon of regular gasoline.

At this point, it is worth remembering that between 2010 and 2019 inflation in the country hovered between rates of around 4%.

Then the pandemic arrived with all kinds of disruptions.

The excess demand coming out of the crisis, driven by fiscal stimuli and the desire to spend by Colombians who had saved and hibernated for almost two years, injected upward collateral effects into prices.

Eduardo Lora, former chief economist of the Inter-American Development Bank, estimates that this pressure has already been corrected with the gradual increases in interest rates, which have made access to credit more difficult and expensive.

Also to slow down growth.

The two items that have not given any respite with their ups and downs are the price of a gallon of regular gasoline and food.

Lora remembers that with “inflation one can never relax because one has to always look forward.”

2024 poses a complex cocktail with climatic fluctuations and the Government's hesitations regarding the elimination of the diesel subsidy, which is more polluting and mostly used by transport unions.

Daniel Osorio, director of monetary policy at the Ministry of Finance, explains that gasoline prices increased by 42% last year: “if we take away that increase compared to inflation, the fall in inflation would have had the same pace.” than in the rest of Latin America.”

For December of last year, core inflation, an indicator desired by economists because it excludes energy and food, stood at 9.23% annually.

That is why the January results give a second wind with the accommodation and electricity sector leading the annual variation figures: “A part of the 2023 inflation was caused by the elimination of the gasoline subsidy.

But it wasn't much, because in reality the most used fuel was ACPM.

Another part was the price of food, in a year with many floods that affected supply,” argues Giralti.

If global vicissitudes and unforeseen events are added to all of the above, the trend does not mean that it is time to relax.

Now international uncertainty focuses on the supply problems that the conflict in Gaza may generate on cargo ships and maritime trade in the Red Sea.

Investors and shipping companies, unaccustomed to managing risk, increased transportation costs by 170% in January, according to the Freightos.com platform.

Eduardo Lora summarizes: “We still have a long way to go.

We don't have a clear horizon.

There may still be a shock in supply if El Niño becomes very severe with droughts, if fires damage productive capacity.

Then there are doubts about the fiscal boost to demand, with public spending, where there is a fairly large margin of error.

And finally the shock of controlled prices such as gasoline, which may also require additional efforts.”

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