Tax reform and minimum wage would prolong high inflation in Colombia

The cost of living in Colombia has continued to rise in recent months in which inflation has broken, month after month, new records. Prices were expected to start declining or easing in late 2022, but that would mostly be achieved in early 2023.

According to a report by Corficolombiana’s economic research team, Colombian inflation would remain higher than expected in 2023, among other reasons, due to the tax reform and the increase in the minimum wage next year.

Read also: Check out our coverage on Colombia

According to experts, inflation “will remain relatively stable (at a plateau) at current levels until the beginning of 2023 and would begin to decline only after January given the moderation in food and goods prices, closing 2023 at 7.6%, above the 7.2% that we previously estimated.”

“The upward revision of our forecast is due to: i) the impact of the tax reform on food prices; ii) the indexation of rents and other items to higher inflation (12.2%) and to an increase in the minimum wage next year that we expect to be close to 15%; and iii) the additional pressures of the depreciation of the peso since the end of October,” the analysts added in the report.

It is worth mentioning that in the new tax reform, which is expected to be approved in its entirety this week, taxes were placed on some ultra-processed foods and also on sugary drinks, which would take effect from November of next year.

Given the above, Laura Parra, a local economy analyst at Corficolombiana, explained that although there would be a moderation of annual inflation in January, in November of next year there would be a new force that would boost the indicator, making it close above 7.5% in 2023.

The impact of the tax on inflation would occur via the food and services category “because restaurants would transfer these higher costs to consumers,” Parra commented.

WHAT IS DRIVING PRICES IN COLOMBIA?

The experts explained in the report that “46% of inflation in the first 10 months, which amounted to 10.9%, was driven by demand factors, that is, goods and services other than food and regulated, in a context strength of household consumption, indexation of rents and other CPI items to the minimum wage, and transfer of the depreciation of the Colombian peso to inflation (pass-through).”

Regarding the other 54% of inflation so far in 2022, analysts commented that this is due to supply pressures, due to higher production costs, adverse weather conditions for the production of some foods and the still latent effects of national unemployment.

With information from Bloomberg Línea/Nicolo Filippo Rosso

For the full picture, see our Brazil Tax Reform: Complete Guide.

More: Brazil news in English, every day from The Rio Times.