Thursday, February 02, 2012

Rising Inflation in Colombia

Colombia Reports: Colombia’s Central Bank to Target Inflation in 2012
El Tiempo: Inflacion en el 2011 fue de 3,73%, y de 4,35% para los pobres
MercoPress: Colombia Aims to Become Latam Third Largest Economy by 2015
WSJ: Colombia Targets Inflation as Economy Booms

Currently, Colombia is Latin America’s fourth largest economy and hopes to become its third largest by 2015. Colombia has been less affected than other Latin American economies by the global financial crisis that has caused an economic slowdown throughout the region. Colombia’s successful efforts at making the country safer from guerrillas have led to an increase in foreign investment to approximately $13 billion a year. Increased foreign investment in Colombia’s energy sector helped stimulate 5.5% growth in 2011.

Although Colombia’s Central Bank President, Jose Dario Uribe, announced that the European debt crisis may cause some slowdown in Colombia, he believes that Colombia’s economy will benefit from various profitable sectors, including oil, coal, construction, financial services, and public infrastructure spending. Growth in 2012 is predicted to reach about 5%.

Experts are concerned that rapid growth will lead to an increase in inflation as consumption rises faster than production, thus pushing up prices due to supply and demand principles. In 2011, inflation averaged 3.7% and, although this is among the lowest inflation rates of Latin America’s major economies, Colombia has not had an inflation rate this high since 2008. Experts, therefore, speculate that Colombia’s Central Bank will raise its benchmark interest rate from 4.75% to 5.25% by the end of 2012 to combat rising inflation by increasing the costs of borrowing and discouraging spending, which lowers consumption.

The inflation rate among Colombia’s minimum wage earners was 4.35% in 2011. A large amount of the poor’s earnings are spent on food, and food prices have been especially high because of a decrease in production caused by cold weather and damage to roads due to increased rainfall that prevented food from being delivered to market. However, the impact of higher prices on Colombia’s poor was likely less than could have been the case. In 2011, Colombia’s minimum wage increased by 5.8 % and, as a result, so did the purchasing power of the poor.

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