Inflation in Colombia Falls to 8.1% to Reverse Year-Long Rise

After a fall in August that reversed a 14-month-long rise, the annual inflation rate in Colombia now sits at 8.1%. This is down from a 16-year high of 8.97% in July, according to the governmental National Administrative Department of Statistics (DANE).

The drop is well below the consensus analyst forecast of 8.6% and comes from a consumer price decline of 0.32% from last month. This, too, was a much further fall than the analyst consensus of 0.18%. Even Bancolombia, the nation’s largest bank, had only predicted a 0.26% month-over-month drop in consumer prices.

“This result is important because it is the first significant correction since inflation began its upward trend over a year ago,” said Bancolombia in a note to investors. “Although we and the rest of analysts expected a correction, its magnitude was much greater than we anticipated.”

Inflation had hit — yet another — 16-year-high in July after consumer prices jumped 0.52% and 0.48%, respectively, over the previous two months. A spike in food prices during the first half of 2016 was the main cause of ballooning inflation, with a drought related to a severe El Niño cycle hurting agricultural yields and a 45-day trucker strike further driving costs skyward.

Colombia’s central bank — Banco de la República — and many independent researchers had been predicting a looming fall in inflation in recent months. Even before the lower figure came in, Banco de la República held the interest rate at 7.75% last month in a 6-1 vote among its voting members. This was the first time in 11 months that the central bank had not raised rates after voting time and time again to intervene to fight rising inflation. Overall, it had raised the interest rate by 325 basis points since September 2015.

The fact that the inflation drop in August was even more pronounced than many expected gives further credence to Banco de la República’s belief that the rate can return to its target range of between 2%–4% before the end of 2017. Bancolombia continues to project 2016 inflation to end 2016 at 6.5%. London-based research firm Capital Economics now expects the same, edging its forecast down from a prior estimate of around 7%.

Adam Collins, an analyst at Capital Economics, was among those surprised by the pace of the drop. But given that it was mostly due to an inevitable food-price correction, this drop doesn’t materially change the overall picture regarding inflation and interest rates over the next year.

“The big fall in inflation was due to a very sharp decline in food prince in basically what seems to mirror the sharp rise we saw in July, which appears to be due to the truck drivers strike,” said Collins. “So inflation will probably not fall at the same pace over the coming months, and we don’t expect the central bank to start cutting interest rates until next year.”

He predicts that, unless inflation does continue to fall very quickly, that Banco de la República will continue holding the interest rate steady. Then it will begin lowering it in the first quarter of 2017.

Annual food price inflation now stands at 13%. Huge month-over-month price drops were seen for onions (37.2%), tomatoes (29.2%), potatoes (28.5%), and peas (18.4%).

Photo Credit: f3rn4nd0