About the Result of May Inflation in Colombia.

Inflation in the month of may announced by the official entity was 7.16% annually, equal to the record of the previous month april, in other words, inflation did not decrease in may after several months in a row of decline, which was contrary to what was expected by analysts and think tanks that expected a slight decrease.

When comparing the two results, april and may equal at 7.16%, it is observed that in both education stands out as the main explanation, but the second place is different, in april it was transportation (its growth is due to gasoline ) and in may it was restaurants and hotels. The third item that explains inflation in april was restaurants and hotels while in may it was accommodation, water and electricity. It is observed that transportation, which in april was second place, in the month of may is fourth place.

There are also more differences between april and may if we observe at a more detailed level the items (within the causes of inflation presented above) that had the most inflation, as presented below. In april the main variations in inflation were fuel for vehicles 35%, followed by fresh fruits 20.8% and then electricity 19.4%. But in may the main variations were in potatoes 37.3%, vehicle fuel 29.1%, fresh fruits 24.5% and then electricity 18.4%.

Note that between april and may there was a recomposition of the main items; In fact, in april, vehicle fuels, which were in first place, became second place in may since the first place was occupied by potatoes, an item that was not among the first places in april */. Fresh fruits and electricity continued to be the most important items in may as they were in april.

But this change in may of potatoes as the main explanation item and the decline in vehicle fuel to second place largely determined that the inflation of the poor (also due to other foods that rose) according to the same official source, rose 6.33% annual in april to 6.63% in may and also that high income inflation fell from 7.56% in april to 7.32% in may. This is explained because the rise in the price of potatoes has a greater impact on the poor due to their income level than on high incomes and also because fuel for vehicles, dropping to second place in the explanation of inflation in may, impacts less to high incomes.

Therefore, although inflation in april and may was the same (7.16%) when looking at income levels, the impact is differential, the poor rose and the high incomes lowered.

Another important aspect is the influence of the may result, which, as mentioned, was the same as that of april (that is, without a decrease) on the monetary policy decisions that the Bank of the Republic must make. Indeed, in the previous months when inflation was falling it was clear to the Bank that it could lower the interest rate at Board meetings, but now with may, which is the stagnation of inflation and at a level above 7 % that is still widely distant from the goal of 3%, it is not so clear that the Bank should continue lowering the rate or at least not at levels of 0.75 as was thought before the results for the month of may came out.

This may result is consistent with the perception that the Bank should not accelerate the reduction of the interest rate without taking into account that there was the possibility that inflation would stagnate or even return and rise. Also to preserve credibility in the Bank with respect to its actions with the interest rate in such a way that downward movements have the certainty that inflation will continue to fall.

A prudential decrease in the rate of 0.25 seems to be the appropriate attitude on the part of the Bank's Board at its monthly meeting while awaiting new inflation results corresponding to this month of june, which will be known next july on the 8th.

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*/ The food sector as a whole only grew 4.4% annually in may, due to the fact that some prices dropped. Indeed, wheat and corn fell -15% and -23%. Legumes -13%, cassava -22% (which acts as a substitute for the potato that rose in price as mentioned before), plantain -22%, onion -2% and carrots -5%. Those that did increase within foods are apart from potatoes, bakery products 15%, oranges and bananas 9% and 12%, blackberries 38%, tomatoes 43% and chocolate 29%.