May inflation would accelerate again and would put the Banco de la República to the test at its June meeting; is this what continues to exert pressure?

Inflation in Colombia seems determined to continue giving headaches to the Banco de la República (Central Bank). When the National Administrative Department of Statistics (Dane) reveals the behavior of the cost of living for May this Friday, the market expects a new acceleration that could push the annual indicator to touch, and even exceed, 6 percent, moving it further and further away from the Central Bank’s long-term target (3 percent).

The data arrives at a very sensitive moment. The Board of Directors of the Banco de la República will meet at the end of June to define the course of monetary policy amidst an open disagreement with the Government over the management of interest rates, a discussion that has become one of the country’s main economic fronts.

Calculations from different financial entities indicate that inflation is not only continuing to rise, but that the factors driving it are increasingly broad and persistent. It is no longer just about food or fuel. Now, rents, public services, transportation, meals outside the home, and other services highly indexed to the increase in the minimum wage are appearing strongly.

Estimates for May range from an annual inflation of 5.82 percent to 6.02 percent. The brokerage firm Acciones & Valores projects a monthly variation of 0.45 percent, which would bring annual inflation to 5.82 percent.

For its part, Davivienda estimates a monthly variation of 0.56 percent and an annual inflation of 5.93 percent.

Corficolombiana, meanwhile, calculates a monthly inflation of 0.53 percent and an annual rate of 5.91 percent, while the highest forecast comes from Grupo Cibest, parent company of Bancolombia, which expects a monthly variation of 0.64 percent and an annual inflation of 6.02 percent, a level that would be the highest since August 2024.

Although there are differences in magnitudes, analysts largely agree on the drivers of the increase.

The first factor is food. Bancolombia estimates that this group would register a monthly variation of 0.98 percent, driven by both perishable and processed products. The entity warns that annual food inflation would reach levels not seen since the end of 2023.

Acciones & Valores also expects significant pressure from this component. According to the firm, the effects of rising fertilizer and imported input costs are already beginning to be felt, while some producers would be adjusting their decisions given the growing probability of an El Niño phenomenon during the second half of the year.

The second front of pressure is services. Rents, administration of co-owned properties, restaurants, and other housing-related expenses continue to reflect the effects of the minimum wage increase.

For Bancolombia, annual services inflation could reach 6.98 percent in May, driven mainly by rental rates and meals consumed outside the home. The entity warns that the indexation effect remains high and hinders a faster price normalization.

Davivienda shares that assessment. The entity believes that the main contribution to May’s inflation will come from accommodation and public services, due to the indexation of rental fees and tariffs such as aqueduct and electricity.

Corficolombiana also points out that services indexed to the minimum wage — including meals outside the home, domestic service, and co-owned properties — will continue to exert significant pressure on the CPI.

Another common element in the analyses is the effect of regulated prices. Davivienda foresees a significant contribution from transportation due to the adjustment of fuels, recalling that gasoline and diesel registered increases of 400 and 200 pesos per gallon, respectively, since the beginning of May.

Bancolombia estimates that monthly regulated inflation would reach 0.79 percent, driven by fuels, urban transport, water, gas, and electricity.

Corficolombiana agrees that gasoline, water, and sewerage will continue to be some of the main sources of pressure on prices.

Beyond supply shocks, some analysts agree that inflation is showing signs of persistence associated with internal economic factors.

Corficolombiana maintains that nearly 88 percent of the inflation increase observed between January and April can be explained by factors related to demand and indexation, especially those linked to the sharp increase in the minimum wage.

The firm warns that services excluding rents, one of the segments most sensitive to the minimum wage, explain a large part of the inflationary rebound recorded this year.

In a similar vein, Acciones & Valores points out that accommodation, rents, restaurants, and other services continue to reflect higher labor costs and demand that remains resilient despite high interest rates.

If there is one risk that is repeated in the reports of the entities, it is climate. Acciones & Valores, for example, warns that the possibility of an El Niño phenomenon during the second half of the year could become the main upward factor for inflation. The entity even mentions the possibility of a high-intensity event that simultaneously pressures food and energy prices.

Corficolombiana also incorporates this risk into its scenarios and considers that food could be affected by higher fertilizer costs and adverse weather conditions in the coming months.

Perhaps that is why the projections are not encouraging either. Bancolombia indicates that analysts’ inflation expectations are on average 6.48 percent for the end of this year.

Davivienda projects inflation of 6.61 percent by the end of 2026. Meanwhile, Acciones & Valores maintains an expectation close to 6.7 percent and warns that, in adverse climate scenarios, the indicator could even exceed 7 percent.

The conclusion reached by almost all entities is that the rebound in inflation significantly reduces the Banco de la República’s room for maneuver.

Acciones & Valores believes that the persistence of inflation and the deterioration of expectations justify a 75 basis point increase in the interest rate during the June meeting, bringing it to 12 percent.

Bancolombia shares that expectation and estimates that the rate could end the year at 12.75 percent.

Corficolombiana also anticipates a new increase and maintains that the majority of Board members who already voted to raise rates in previous meetings remain consolidated.

Thus, the data that Dane will reveal will not only serve to measure how much prices increased in May. It will also be one of the key pieces in defining whether the Banco de la República tightens its monetary policy again and how far it is willing to go to prevent inflation from settling, once again, above 6 percent for the rest of the year, some analysts agree.