Why Is Colombia Unable to Tame Inflation, and What Is President Petro’s Strategy?

Prices remain sky-high in the country while other Latin American nations have been able to temper inflation. Which factors are impeding the South American country’s fight against price hikes?

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Bogotá — Despite expectations that the increase in the cost of living had already peaked in Colombia, prices rose 13.34% year on year in March and the country is still struggling to fight the sharpest price rise in 24 years while other Latin American economies begin to temper their inflation.

Colombia continues to struggle to reach an inflation ceiling while in Latin America’s largest economies inflation is starting to cool, as is the case in Brazil, where price hikes slowed for the tenth consecutive month to 5.36% in early March.

Mexico reached its lowest level of inflation since October 2021 at 6.85% year on year in March, while Chile’s annual CPI variation was 11.1%, the lowest level since April 2022.

After Colombian GDP grew at a rate of 7.5% in 2022, the country faced “impressive demand pressures” that in other Latin American countries “were not felt as strongly,” Munir Jalil, head of economic research for the Andean Region at Brazilian investment bank BTG Pactual, told Bloomberg Línea.

“That leaves us with inflation under much higher pressure and that creates a problem for us. Inflation is stuck on a plateau, and we believe we are going to be there for at least a while longer. After April we will start to see inflation dropping, but in a process that will be very slow,” he added.

And even if there is a significant drop in the cost of food, he said that price rises will still be seen in leases, for example, since once the contracts are renewed, last year’s inflation will be factored in.

In addition, he ties the inflationary phenomenon in Colombia to the significant increase in the minimum wage and, to a lesser extent, to a lag in transferring exchange rate changes.

“If people bought raw materials, inventories to produce, at the end of last year, the truth is that the very high exchange rate is still entering into their production costs because they are only now spending those raw materials,” he said.

For his part, financial services provider Corficolombiana’s chief economist, Julio Romero, told Bloomberg Línea that March inflation confirmed that it has not reached its ceiling, which means that “the annual rate of increase in prices continued to accelerate”.

“In March, the basket of goods and services measured by the CPI was 1.05% more expensive than in February. The prices of some foods are moderating, in line with the correction of some production costs, but not enough to counteract the increases that accumulated in the last two years,” he said.

The increase in prices led Colombia’s Finance Minister José Antonio Ocampo to request help from business leaders to “moderate the inflation of industrial products and services”, a request that generated divided opinions among analysts.

Julio Romero states that, unlike in 2022, “inflation in 2023 is being driven more by non-food components, such as services (rent, education, restaurants), goods (vehicles, household appliances, cleaning products), and regulated components (utilities, fuel)”.

He explains that, in this scenario and in aggregate terms, “there is evidence that companies have avoided fully passing on the increase in costs.

The producer price index (PPI) had annual variations close to 30%, while the CPI seems to be reaching a ceiling of 13.3%”, he said.

“This difference between producer inflation and consumer inflation reflects that the raw material shock was significantly assumed by companies. Added to this is the extraordinary depreciation of the Colombian peso over the last year and the increase in tax and labor costs due to the tax reform and the increase in the minimum wage,” he added.

Agreement with businesses

After the inflation data were released, President Gustavo Petro said an agreement had been reached with the National Association of Business Leaders (ANDI) and the Society of Colombian Farmers (SAC) to “design and implement measures to reduce food prices”.

Jorge Bedoya, the president of SAC, said in a tweet on April 5 that the farmers the group represents are willing to work jointly on measures to contain food prices, in response to Petro’s tweet announcing the agreement with SAC and ANDI to lower food prices for consumers.

In March, the monthly variation of the food and non-alcoholic beverages division was 0.91%, with decreases in products such as poultry meat, sugar, carrots, onions, potatoes, cassava and tomato.

In fact, last month the subclasses with the lowest contributions were tomato with -0.04 percentage points, potatoes with -0.03 and onion with -0.01.

“Here we must seek measures that contribute to reducing the cost of producing food,” Bedoya said in an interview with Bloomberg Línea.

He pointed to the high cost of credit due to raised interest rates, the peso’s depreciation, the problems generated by the weather, international markets, and the volatility of raw materials prices as the variables that are making inflation persist, and which are issues to be discussed with the government.

For Bedoya, one of the key points of this conversation will be what is going to happen with the labor reform “because it should not increase the cost of producing food via labor”.

“We definitely do not contemplate price control measures at all, which have been proven that what they generate is more inflation, as they can generate parallel markets, they can generate shortages, and that is why here we have to attack the elements that can be worked on, through production costs, and always keep in mind that inflation is the result of the interaction between supply and demand of food in the country,” Bedoya said.

He added that SAC seeks profitable food production and that food sovereignty is guaranteed, and that is why they will take this message to the government.