Colombia Inflation Unexpectedly Rebounds After Key Rate Pause

Colombia's inflation rate unexpectedly rebounded in December 2024, climbing to 5.2% from 5.41% in November, according to data released by the country's statistics agency, Dane. This increase was slightly above market expectations of 5.16% and marked a reversal from the steady decline in inflation observed over the previous five months. The annual inflation rate had been on a downward trend since October 2021, reaching its lowest level since that month.



The rise in inflation was driven by an increase in food prices, which climbed by 3.31% compared to 2.34% in November. Transportation costs also contributed to the increase, rising by 5.19% from 5.05% in the previous month. Health expenses and housing costs also increased, but at a more moderate pace. Meanwhile, education costs surged by 10.62% for the second consecutive month.

The unexpected rebound in inflation comes after the Colombian central bank, Banco de la República, decided to keep its benchmark interest rate unchanged at 9.5% in January 2025. This decision was made despite calls from the government for more significant rate cuts. The bank's general manager, Leonardo Villar, cited challenges associated with a higher annual increase in the producer price index, an increase in the minimum wage that exceeded observed inflation, and a rebound in inflation expectations as factors influencing the decision to maintain the existing rate.

The pause in interest rates has allowed the central bank to assess the effectiveness of its previous rate cuts, which had reduced the interest rate from 13% at the beginning of 2024. However, the recent rebound in inflation may prompt the bank to reconsider its monetary policy stance and potentially implement rate cuts in the future to combat rising prices.

External factors, such as global supply chain disruptions and commodity price fluctuations, have also played a role in shaping Colombian inflation trends. The increase in food prices, for example, can be partly attributed to these external pressures. The International Monetary Fund (IMF) has acknowledged the influence of external factors on Colombian inflation, describing the indicator as a measure of inflation based upon the year-on-year change in the average consumer price index.

In conclusion, the unexpected rebound in Colombian inflation in December 2024 has raised concerns about the effectiveness of the central bank's monetary policy stance. The pause in interest rates and the recent inflation dynamics may influence future monetary policy decisions, as the central bank considers the appropriate response to inflation trends. External factors, such as global supply chain disruptions and commodity price fluctuations, have also contributed to the recent inflation trends in Colombia.