Is there a Risk of Stagflation in Colombia? Experts Differ

With an economic growth of 0.3% and high inflation at 11.43%, experts differ on whether there is a risk of stagflation in Colombia. Stagflation is a rare phenomenon that occurs when a period of economic stagnation is accompanied by persistently high inflation and a sharp rise in unemployment.

Inflation and GDP Growth

In August, inflation continued its slow decline. This is good news, but the downside is that the decline was less than what experts and the Central Bank of Colombia had anticipated. According to official data released just last week, the CPI for August 2023 stood at 11.43%, with a monthly growth of 0.7%. Some organizations had estimated the index to be around 11.14%.

The reasons why the CPI is not falling as quickly as expected, and as quickly as it is happening in some countries around Colombia, vary according to experts. According to Sergio Olarte, an economist at Scotiabank Colpatria, this situation occurred due to an unexpected increase in food prices. He believes this increase was primarily driven by the closure of the road connecting Bogotá to Villavicencio in the Eastern Plains.

It’s worth noting that food and non-alcoholic beverages were one of the sectors that most significantly pushed up the CPI in August. However, according to Henry Amorocho Moreno, a professor of Public Finance and Taxation at the Universidad del Rosario, “there are two other factors driving up the CPI: the rise in fuel prices and electricity rates,” as he told Infobae.

Regarding the increase in gasoline prices, it is due to the government’s decision to stop subsidizing fuel. The increase, which was already anticipated by authorities, has been constant over the past year, and it is still expected to rise a bit more, putting the price of a gallon of gasoline at around 16,000 pesos.

More Pessimistic Analyses Talk About Stagflation

There are differing opinions among experts regarding whether Colombia is at risk of falling into stagflation or not. While some believe the country is already in that situation, others see the risk as very low.

Jorge Restrepo, a professor at Universidad Javeriana, is one of the most outspoken proponents of the stagflation theory According to Restrepo, Colombia is “already in stagflation” due to slow economic growth. “Growth has been marginal in the last semester, and in any case, the expected growth in Gross Domestic Product (GDP) and income will barely compensate for population growth. So the economy has already stagnated while consumer price inflation remains in double digits,” the professor told Portafolio.

Jorge Restrepo emphasized the role of inflation in causing stagflation in a country. In Colombia, the CPI is decreasing, but at a slower pace than anticipated, and this is often a key factor in the emergence of this economic phenomenon.

“That means that unless fiscal policy changes, we can expect slow declines in inflation, not sharp declines as seen in similar countries to Colombia, such as Chile, Mexico, Peru, or Brazil. Thus, it is likely that we will have positive interest rates after adjusting for inflation for a longer time, and therefore, a slower economic recovery,” Professor Restrepo concluded.

More Optimistic Analyses Rule Out Stagflation

Not all economic experts share Jorge Restrepo’s pessimistic view. According to Munir Jalil, an economist from the Andean region at BTG Pactual, the likelihood of stagflation occurring is not part of their predictions.

Jalil believes that, while it is true that the decline in the CPI is slower than expected, “for stagflation to occur, we would need negative economic growth, which is not expected in Colombia.”

It’s also important to note that the interest rate offered by the Central Bank of Colombia is still very high. This measure is usually taken to curb inflation. While it is effective in this regard, it limits economic growth. In this sense, the government and other organizations have been urging the Central Bank of Colombia for weeks to lower the interest rate, which currently stands at 13.25%.

Although it is very high, there are grounds to hope for a decrease in the coming months: in the last review, the authorities of the Colombian central bank decided to freeze the rate, something that hadn’t happened since the inflationary period began a year and a half ago.

With this expectation, if the interest rate decreases, it can alleviate pressure on the interest rates offered by banks for loans, facilitating their processing and approval, and ultimately, the growth of economic activity in Colombia.