Author(s) / Editor(s): 
Hernando Vargas HerreraAndrés GonzálezEliana GonzálezJose Vicente Romero Luis Eduardo Rojas

Assessing Inflationary Pressures in Colombia

Abril
2009

The assessment of inflationary pressures in Colombia has faced two important challenges in the present decade. The first one occurred in 2006 and consisted of detecting an overheating economy in the midst of fast growing investment and increasing measured productivity. The second challenge took place in 2007-2008, when the economy was hit by a number of “supply” shocks and core inflation indicators sent diverging signals about the transmission of those shocks to macroeconomic inflation. An evaluation of the first episode shows that traditional indicators of productivity and unit labor costs were not sufficient to identify “supply” and “demand” movements. Thus, policymakers had to rely on a wider array of variables to gauge the state of the economy. Regarding the second episode, an evaluation of core inflation indicators according to standard criteria suggests that no particular measure seems to be clearly superior to the others. Hence, the assessment of inflationary pressures should not rely only on one or few core inflation indicators, since some signals could be picked by some measures and not by others. Moreover, this result suggests that the analysis of core inflation measures must be complemented with a careful examination of the persistence of the shocks and a close monitoring of their impact on inflation expectations. It is found that the latter are formed on the basis of past inflation, but that the inflation target also plays a role. In addition, inflation expectations partially move with “supply” shocks, an outcome that reflects a degree of credibility of monetary policy.

The series Borradores de Economía is published by the Economic Studies Department at the Banco de la República (Central Bank of Colombia). The works published are provisional, and their authors are fully responsible for the opinions expressed in them, as well as for possible mistakes. The opinions expressed herein are those of the authors and do not necessarily reflect the views of Banco de la República or its Board of Directors. 

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