COLOMBIA – Upside inflation surprise consolidates expectation of a September rate hike

Inflation expectations are likely to keep rising

Vittorio Peretti & Carolina Monzón


Inflation in July surprised to the upside with consumer prices rising 0.32% from June (0.0% one year before), 20bps above the Bloomberg market consensus (Itaú: 0.0%). It was the highest monthly print for July since 2016. The main contributors to the monthly price gain were the 0.31% increase in housing costs (contributing 10bps; boosted by rentals and utility prices), restaurants and hotels (+0.80%; contributing 8bps), as the economic reopening consolidates, and the 0.38% increase in the food and beverage component (contributing 6bps). Meanwhile, countering price increases were communications (-0.11% MoM). Consumer prices excluding food and energy prices rose 0.29% MoM, around 10bps above last year. On an annual basis, inflation increased to 3.97% from 3.65% in June, at the upper bound of the range around the 3% target. The large upside surprise will likely push inflation expectations up, which along with the urgency of two board members to already raise rates in July, and the more upbeat growth scenario, consolidate our expectation that the board would initiate the normalization cycle at the next meeting in September with a 25bp hike to 2.0%.

While food and energy prices are accelerating swiftly, core inflation is normalizing more slowly. Consumer prices were pulled up by rising energy prices (+7.87% YoY, accelerating from the 7.12% gain in June). Inflation excluding food and energy prices picked up at a much milder pace to a still-low 2.43% (2.32% in the previous month). Price acceleration was recorded in both durable goods (4.43%, from 4.12% in the previous month), and non-durable goods (from 7.13% to 7.60%). At the margin, we estimate that inflation accumulated in the quarter ending in July was 7.6% (annualized), compared to 6.8% in 2Q21 (2.8% in 1Q21). Core inflation accelerated to 3.9%, from +3.2% in 2Q20 (1.4% in 1Q21).

With the domestic demand recovery consolidating amid the persistence of supply shocks (domestically and internationally), inflation is likely to end the year close to 4.0%.

Vittorio Peretti 
Carolina Monzón