Colombia’s Inflation Falls to 3.99% in June – Back Within Central Bank’s Target Range for First Time in Over Two Years

Consumer prices in Colombia rose by just 0.12% from May to June, leaving the year-over-year inflation rate at 3.99%, according to the National Administrative Department of Statistics (DANE). This puts annual inflation back within the central bank’s target range of between 2%–4% for the first time January 2015.

The 3.99% rate is 38 basis points below the 4.37% annual inflation in May and less than half of the 8.6% rate seen in June 2016, according to DANE figures.

Food prices, which dropped by 0.21% from May to June, were the largest factor in an overall inflation fall that outpaced the consensus market forecast. Transportation and education prices — nearly flat since last month, rising by just 0.02% and 0.01%, respectively — were the other major factors that helped inflation land back within the target range.

“There were declines in most foods, including tubers, meats, and dairy products,” said Bancolombia in a note to investors. The Medellín-based bank added that “the good performance of food prices responds to the abundant supply of most products.”

Recreation and cultural activities saw the biggest price jump, spiking by 2.86% from May to June. Healthcare (up 0.35%) and housing costs (0.24%) also rose by more than the overall consumer price index in June, bringing the year-over-year increase in those key economic categories to 7.38% and 4.63%, respectively.

Core inflation, which excludes food prices and price-regulated categories, came in at 4.86% in June on a year-over-year basis. This is down from the 5.1% level seen in May, per figures from DANE.

Bancolombia, the nation’s largest bank, said that the data for June “was very close to our forecast” and thus has not altered its inflation prediction for the rest of the year. It sees another inflation drop in July followed by an uptick thereafter beginning in August that will lead to inflation ending 2017 at 4.2%.

The ongoing fall in inflation — which has now gone down in 11 straight months on a year-over-year basis — has prompted the central bank to cut the nation’s interest rate aggressively in recent months. While inflation was the Banco de la República’s key concern last year, its focus has now turned to kickstarting activity in a sluggish economy.

The central bank cut the benchmark interest rate by 50 basis points in June. This followed a 25-point cut in May and a 50-point cut in April. Overall, it has reduced the interest rate at six of its last seven monthly meetings.

Given this rate-cutting pattern, the significant drop in inflation seen in June, and the overall economic climate in Colombia, Bancolombia has altered its expectations for how the central bank will act for the rest of the year. It now projects that the benchmark interest rate will close the year at 5%, down from its previous estimate of 5.75% (which is now the current rate).

“Although the monetary policy landscape continues to be complex, we believe that in the coming months the issuer board will be able to take monetary policy to neutral ground,” said Bancolombia in a note.

London-based research firm Capital Economics continues to project even more aggressive cuts by the Banco de la República. It expects the interest rate to end 2017 at 4.5%.

In a note to investors last week, Capital Economics stated that the tax reform passed by the Colombian Congress last December, which took the nation’s value-added tax rate from 16% to 19%, is continuing to weigh on consumer spending and overall economic growth. The concern over low-growth combined with moderating inflation levels, it says, will compel the central bank to continue making interest rate cuts throughout the final six months of the year.

“We think there are two reasons why the central bank is likely to ultimately cut the policy rate by more than most expect over the remainder of this year,” stated Edward Glossop, Latin America economist at Capital Economics. “First, economic activity is likely to remain weak over the remainder of this year … Second, and on a related note, inflation has further to fall.”

Photo: Colombia inflation rate continues to decelerate as food prices continue to recover following a spike seen in 2016. (Credit: Jared Wade)