What Jumps Out : Inflation and the Central Bank

It would be a case of small acorns to say that June 12 month inflation (9.67%) was lower than the consensus number of 9.73%. It is still the highest in recent memory and you’d have to go back to June 2000 to equal it. In reality that was a different era in terms of Colombia’s economy and political history.

The monthly number (0.51%) was below the consensus of 0.54% but core inflation continues to bubble up. There are no consensus estimates but while the June reading of 0.47% was below that of May’s 0.68% – the 12m number rose to 6.84% from 6.50%.

In terms of the headline number, it was food (+0.65%) & housing (+0.65%) which caused the most damage, meat (0.07%) was again a major contributor.

All this was on the day the central bank minutes were published and whilst there wasn’t a great deal of new information versus last week’s press conference there is much to cause alarm.

The Central Bank is still behind the curve, where is seems to have been since the end of 2021. Emerging market central banks may have acted faster than those of the developed world, but it doesn’t mean they have done enough. The decision to increase rates from 6% to 7.5% was unanimous but the magnitude of that increase surely demonstrates the depth of concern.

In the minutes there are comments that allure to inflation being further driven by consumer spending and weak peso and it is hard to see what can be done about that – the dollar is slapping every currency in the world around and Colombia is no exception, now with oil wobbling things could get worse.

Yesterday incoming Finance Minister Ocampo said there will be no more VAT free days; that is a move I personally champion. It was one thing at the depth of COVID as a panic measure but when your economy is booming it only encourages reckless spending whilst denying valuable revenues to the central government. The local retailer federation Fenalco was up in arms – showing little consideration for the much bigger picture.

Fedesarrollo in their latest survey saw analysts calling for an 8.5% terminal rate by September – is that now feasible if spending continues, oil stumbles or the rain continues? Perhaps the Central Bank needs to make another extreme rate increase before inflation really gets away from them whilst this might at the same time add a little protection to the Peso?

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That is about it for today – remember these are just themes that jump out at me – please refer to your local analyst, economist, salesperson or soothsayer for more details.

My regards to all,

Roops