Inflation: Is the emergency over? / Analysis of Ricardo Ávila – Sectors – Economy

A year ago the issue was the great cause of concern for many people: finance ministers, central bankers, investors, savers or the general public. Today the sense of urgency has disappeared as the problem appears as a manageable challenge.

(Also read: Find out why the increase in the minimum wage slows down companies and job creation).

This is inflation, defined by textbooks as «increase in the general level of prices.» After having reached its highest point in four decades in mid-2022, the most recent records show a moderation that goes beyond the analysts’ bets.

This was confirmed last week when the United States authorities reported that in June the annualized rate of increases was 3 percent, a third of the figure registered 12 months ago. Although in Europe the correction has been slower – since the data was located at 5.5 percent – ​​the days of the past calendar in which the level of 10 percent per year was exceeded remained to be remembered.

At the same time, in Latin America things are also going much better, apart from the critical cases of Venezuela and Argentina, where the shortage continues unbridled and exceeds 100 percent per year. For example, in Brazil inflation is barely above 3 percent, while in Mexico it is 5; in Peru at 6.5 and in Chile at 7.6 percent per year, at the close of the first semester.

(In addition: Retail trade sales complete 3 months of decline: in May they fell 5.1%).

Colombia, by comparison, appears behind in the list, although here, too, the curve has changed direction. As reported by Dane a few days ago, the increase in the consumer price index reached 12.1 percent in Juneits third consecutive decline after the highest point so far this century was reached in March: 13.3 percent.

As a consequence of the aforementioned behavior, both in this and other latitudes the debate on a decrease in interest rates, which have increased notoriously in recent times, has risen in tone, as a way of cooling economies and containing increases. For those who owe money, the relief would be welcome and would allow the pace of economic activity to be higher.

Such a perspective also influences the price of currencies. Without going any further, the fact that the representative market rate for tomorrow is at 4,089 pesos per dollar –a drop close to 700 pesos so far this year– has a lot to do with the change in the global environment and a matrix of different risks than a few months ago.

Does the above mean that the scare is behind us and that abundant and cheap money is just around the corner? Absolutely. In fact, the most cautious insist that it is still too early to claim victory, thus the warning lights in many countries have gone from red to yellow.

The power of inertia

On the occasion of a pronouncement he made last Thursday, the director of the International Monetary Fund, Kristalina Georgieva, spoke of the need to avoid “premature celebrations”. For the Bulgarian economist, «the lessons of previous inflationary episodes show that loosening policies too early can undo the progress achieved.»

In this regard, there will be no shortage of those who say that the multilateral entity is healing itself. After all, when a large part of the restrictions caused by the pandemic were lifted at the end of 2021 and prices began to rise, the agency called for calm and maintained that the phenomenon was temporary.

Shortly thereafter, once the Russian invasion of the Ukraine occurred and huge bottlenecks appeared in the supply of food and minerals, it became clear that the challenge would be more lasting. It was at that moment that the Monetary Fund was accused of a certain complacency and the central banks of the United States and Europe were slow to react.

It is possible that some of that has to do with the caution of now. However, a closer look at the statistics shows that there are still compelling reasons to keep your guard up and the brakes on.

In this way, specialists focus on what is known as basic or core inflation, which is the measurement that excludes volatile components such as the price of gasoline or food. The strength of the current that is below the surface is what makes it possible to detect if the emergency is over.

And in this respect, the part is much less auspicious. For example, in the northern hemisphere observed levels of core rises remain around 5 percent per year, still far from the long-term goal of 2 percent per year.

One of the reasons for greatest concern is that wage increases exceed those of prices. This persistence, accentuated in some cases by bottlenecks in the labor market, suggests that future increases in the prices of goods and services will reflect this higher cost.

Because of this, everything indicates that those who dream of substantial interest rate cuts are wishing. As far as the US economy is concerned, a squeeze of a quarter of a percentage point may take place in this second part of the year, while in the Old Continent more twists would come.

Even so, it is worth celebrating that the scenario of an upward spiral leading to very restrictive policy did not come to fruition. That is good news for businesses, people and countries. In the specific case of Colombia, whose public debt service takes a significant and growing slice of the national budget, the relief is more than welcome.

What’s missing

Once this is recognized, it is worth insisting that the national economy is still far from claiming victory when it comes to defeating the monster of inflation. Both the calculations of the analysts and those of the Banco de la República itself indicate that by next December the increase in the family basket will be close to, or perhaps a little below, 9 percent per year.

This means that, in the best of cases, returning to the long-term parameters defined by the Issuer –inflationary rhythm between 2 and 4 percent per year– will not happen until well into 2024. Given this perspective, the question arises of why the shortage was felt more strongly here than in other places and why it took us longer than others to return to the desired path.

For insiders there are at least four main factors. The first is that the value of food rose a lot in the national territory – close to 50 percent in two years – something attributable in part to climatic reasons such as the rains caused by the La Niña phenomenon.

To this is added the devaluation of the peso that made imported items more expensive, including food and food concentrates that come from abroad. This acceleration coincided with the tail end of the war in Ukraine and happened while in most of Latin America other currencies were gaining ground against the dollar.

As a third factor, it appears that Colombia has indexing mechanisms that are strong and institutionalized. To cite one case, rents are readjusted based on the price increase of the previous year, as are multiple rates.

An additional consideration deserves the minimum wage that is reviewed every 12 months. Here the usual thing is not only that the increase reflects the behavior of inflation, but that something additional is added to it, which creates a kind of snowball that is expressed in practice in the well-known January slope.

Apart from what has been mentioned, there was an unexpected element that aggravated things. Either with the intention of not hitting consumers or creating political turbulence, certain hikes were postponed in 2021 and early 2022 due to the coronavirus.

This was the case with electricity and fuel rates, which began to fall further and further behind their international parity level. Even the days without VAT, which ended because their fiscal cost was unjustifiable, lead to a lower base of comparison between what was paid a year ago for certain items.

(You can read: Production of the manufacturing industry after falling in Colombia: -3.4% in May).

Be that as it may, the pressures were accumulating and the moment of normalization had to arrive. In a responsible manner, the Petro administration began to dismantle the subsidy for regular gasoline, which resulted in increases of up to 600 pesos per gallon, month by month. But that determination – which will last until the end of the year and will eventually cover Diesel – is noticeable in transportation costs and makes it much more difficult for inflation to decrease.

Although it came to affect even higher in the surveys, 84 percent of Colombians believe that the cost of living in the country is worsening, which the purchasing power of families, according to a bimonthly survey carried out by the firm Invamer . This high level is only comparable to that of the perception of insecurity, with which it is evident that the shortage heads the suspicions of the people.

Faced with such a qualification, the local authorities have no choice but not to deviate from a path that is beginning to bear fruit. Among the factors in favor of the reduction in the pace of price indices to be faster is the prospect of good harvests, together with the drop in the exchange rate.

If the Dane confirms in the coming measures that the speed of price increases is less, the question is when the Bank of the Republic will begin to lower its interest rate, which today is 13.25 percent per year. Although some would like this to happen at the Issuer’s next board session, called for July 31the bets speak of September as the most probable date of the start of the reductions.

Such a vision does not ignore the risks that are on the horizon. Both external circumstances and the behavior of the weather, as well as potential errors in government decisions, can lead to descents taking longer.

In the opinion of Marc Hofsteter, a professor at the Universidad de los Andes, «if all goes well, the downward path should continue.» Among the dangers in sight, the expert speaks of the fact that «El Niño tends to have greater effects on inflation than La Niña and this can reverse what has been recently observed in food prices and generate pressure on the energy tariff front.» .

Political issues and their impact on investors cannot be ignored either. For the academic, «the exchange rate, which has helped in recent months, could stop doing so if the reforms scare the markets again and if doubts begin to settle about the seriousness of fiscal policy, with respect to the which there are already storm clouds”.

Because of this, the underlying message is that the task is not finished. Even if the worst case scenario regarding inflation did not come to pass, it is mandatory to keep a short rein. And that admonition is valid in the world, but especially in Colombia.

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RICARDO AVILA
Special for EL TIEMPO
Twitter: @ravilapinto