Itaú BBA - COLOMBIA – Inflation ends 2018 near target

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COLOMBIA – Inflation ends 2018 near target

January 7, 2019

With global uncertainties on the rise and inflationary pressures limited, the central bank will likely keep the policy rate unchanged for the time being.

Annual inflation ended 2018 slowing to 3.20%, from 3.27% in November, within the central bank’s 2%-4% range around the target for first time since 2014. In December, consumer prices gained 0.30% from November (0.38% last year), broadly in line with the 0.33% Bloomberg market consensus and our 0.32% forecast. With global uncertainties on the rise and the domestic recovery not yet consolidated, limited inflationary pressures favor the central bank keeping policy rate unchanged at mildly expansionary 4.25% for the time being.

Food price normalization (+0.40% MoM; 0.19% at the end of 2017) and housing expenses (+0.30% MoM; 0.14% one year earlier) drove gains in the month. The later was lifted by higher prices for electricity services and cleaning tariffs. Meanwhile, communication prices were the main drag in December (-0.03%; +1.2% one year ago). Prices excluding food came in at +0.25% (+0.46% one year ago), while regulated prices (excluding food items) gained 0.51% (0.67% one year earlier). Meanwhile, despite the weakening of the Colombia peso, tradable goods prices (excluding food and regulated items) increased a mild 0.12% in the month (0.32% one year ago) and non-tradable prices (also excluding food and regulated prices) gained 0.22% (0.47% in December 2017).

Core inflation continues to moderate. The regulated component of the inflation basket led annual inflation, as it expanded 6.37% year over year (6.53% in November), followed by non-tradable prices (excluding food and regulated prices) which ended the year within the 2%-4% range - at 3.79% - for first time since August 2015 (4.05% in November). Meanwhile, the core measure of inflation that excludes food prices came in at 3.48%, down from 3.70% in November, while the version excluding food, fuels and energy dropped to 3.01% (from 3.26%). Tradable good prices (excluding food and regulated items) continued to drag down inflation (1.09% vs 1.29% previously).

Inflationary pressures moderated at the margin. The three-month accumulated inflation in the final quarter of 2018 was 3.8% (seasonally adjusted and annualized) versus the 4.3% recorded as of November, as tradable inflation slowed to 0.3% (1.1% in November).  There was also a moderation in the non-tradable component (3.9% vs. 4.4% as of November) and food inflation (3.3% vs. 5.6% as of November). Meanwhile, regulated inflation ticked up 0.6pp to 6.9%.  

For 2019 we expect inflation to end the year at 3.4%. The modified tax reform (which dropped a proposal to increase VAT rates for food staples) has diminished inflationary risks for 2019. However, higher inflation during next year is likely as the weaker exchange rate (on the back of lower oil prices) leads to rising tradable inflation, food prices normalize and the above productivity growth minimum wage increase (6%) becomes effective. On the other hand, the still negative output gap and controlled inflation expectations would contain the acceleration.

Miguel Ricaurte
Carolina Monzón

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