Given the drop in the dollar in recent weeks, several analysts have wondered if inflation might fall. Here is the answer.
The dollar in Colombia, during the last month, saw a strong depreciation that continues to respond to external economic issues: the US currency continues to fall. Among the focus remains what is happening with inflation.
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As is known, the dollar in Colombia is usually a determining factor of other macro indicators, such as inflation.
In this way, every time there is strong volatility, the market is aware of what the transmission may be. that goes from the exchange rate to the price, for example, of food.
The foregoing takes into account that, in Colombia, a good part of the goods and services demanded by the national economy must be imported.
In other words, businessmen who make purchases from abroad must pay more pesos per dollar, when the exchange rate is high, to be able to acquire the products.
Increases in production costs, on some occasions, tend to be transmitted to that it is the final customers who compensate for this rise in prices.
Hence, otherwise and when the dollar in Colombia shows signs of depreciation, it is plausible to think that inflation might see a reduction.
Can inflation fall in Colombia, due to the low dollar?
Due to the above, and following the most recent Board of Directors of the Banco de la República, the Minister of Finance, José Antonio Ocampo, said that inflation in the country will also show less pressure due to a low exchange rate.
During the month of March, the dollar in Colombia went from touching $4,850 to breaking the resistance of $4,600.
That currency returned to be at the high barrier of $4,500, a figure that had not been seen in Colombia since the beginning of the year, at which time lower pressures on the side of inflation in the country were also expected.
Among the causes that explain the phenomenon, it is worth mentioning, there is a general loss of the United States dollar once morest the rest of the world’s currencies.
The FED, for example, continues to lead the way. Although the rise in interest rates continued, It is coincided with market expectations.
(See also: What is inflation and why does it go up or down in Colombia? The reasons for its movement)
At the same time, the most recent statements by members of the Fed allow us to establish that the rise in rates might be reaching a ceiling.
This while China remains strong in its reactivation process and now supplies the demand for goods and services that fell within the framework of the Covid-19 pandemic.
Leonardo Villar, manager of the Bank of the Republic of Colombia, said that among the indicators that are closely followed, there was a lower exchange rate at the end of last year.
Clarifying the above with the fact that in the first quarter of 2023 the volatility in the international markets has been exceptional, for account of financial stability problems in the United States and some European countries.
“This situation has added uncertainty to the evolution of the world economy, but its effects on the Colombian economy have been limited,” Villar said in the voice of the issuer’s Board.
However, the panorama of what the dollar might imply in Colombia for inflation, it does not leave a certainty regarding what will happen in the short or medium term.
The minutes of the issuer’s most recent Meeting explain that the signs of a lesser slowdown in economic activity might prolong the dynamism of private consumption.
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“They noted (some co-directors) that the sensitivity of the economy to external shocks has increased and the risk of a high exchange rate volatility, even more so given prospects of lower oil prices”read in more minutes.
To the above, we should add that effects are beginning to be seen on subsidies for the purchase of inputs for food production.
But also regarding the future of the main public policies of the Petro government, such as the reforms and what this implies to reduce investor appetite.
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Regions with higher inflation indicators in Colombia
According to DANE, the average monthly inflation in Colombia grew in February 2023 by 1.66% and the vast majority of the main cities were below that indicator.
- Tunja: 2.12%
- Bogota: 1.89%
- Cucuta: 1.83%
- Barranquilla: 1.72%
- Sincelejo: 1%
- Riohacha: 1.16%
- Valledupar: 1.22%
- Santa Marta: 1.27%
The expectation of the dollar side in Colombia is that it ends close to $4,700 at the end of the year, while inflation would return to single digits in 2023.
The most recent Fedesarrollo survey finds that the inflation forecast in Colombia allows the indicator to close at 9% in 2023.