Colombia inflation likely slowed in May, but up in full-year 2025: Reuters poll

A Reuters survey of analysts predicts Colombia's May inflation to have slowed to 0.4%, driven by reduced food cost pressures and peso appreciation, though still exceeding the central bank's 3% target at a projected 5.12% year-over-year. Despite the expected slowdown, inflation expectations for year-end 2025 and 2026 have increased to 4.8% and 3.75% respectively, potentially influencing future central bank decisions after its recent 25 basis point rate cut to 9.25% in April.

Analysis

Colombian consumer price inflation is anticipated to have moderated in May, with a median analyst forecast from a Reuters survey projecting a 0.4% monthly increase, a deceleration from April's 0.66% rise. This expected slowdown is primarily attributed to reduced pressure from food costs and a notable 2.86% appreciation of the peso against the U.S. dollar. If this median prediction materializes, 12-month inflation through May would reach 5.12%. Despite this short-term easing, inflationary pressures continue from services, particularly indexed rents, and regulated goods such as public services. Crucially, the projected 5.12% annual rate remains significantly above the central bank's long-term 3% target. Further complicating the outlook, inflation expectations for the close of 2025 have increased to 4.8% from 4.55% in the prior survey, and expectations for year-end 2026 have also risen to 3.75% from 3.61%, signaling that annual inflation is on track to exceed the target for a fifth consecutive year. This persistent inflationary environment is a key factor influencing the central bank, which surprised markets in April by cutting the benchmark interest rate by 25 basis points to 9.25%, and will be pivotal for future policy decisions, especially with official May inflation figures due on June 9th.

Key Decisions for Investors

• Investors should closely monitor the official May inflation data, scheduled for release on June 9th, as it will be a critical input for the Colombian central bank's upcoming monetary policy deliberations.
• The upward revisions in inflation expectations for both 2025 (to 4.8%) and 2026 (to 3.75%) suggest underlying inflationary pressures may prove persistent, potentially limiting the central bank's scope for further significant interest rate reductions despite the recent cut.
• Portfolio allocations in Colombian assets, particularly fixed income, should account for the sustained deviation from the central bank's 3% inflation target and the implications of rising medium-term inflation expectations on real returns and future monetary policy trajectory.