Assessing inflationary pressures in Colombia

Abstract

The assessment of in ‡ationary pressures in Colombia has faced two important challenges in the present decade. The …rst 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 in ‡ation indicators sent diverging signals about the transmission of those shocks to macroeconomic in ‡ation. An evaluation of the …rst episode shows that traditional indicators of productivity and unit labor costs were not su¢ cient 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 in ‡ation indicators according to standard criteria suggests that no particular measure seems to be clearly superior to the others. Hence, the assessment of in ‡ationary pressures should not rely only on one or few core in ‡ation indicators, since some signals could be picked by some measures and not by others. Moreover, this result suggests that the analysis of core in ‡ation measures must be complemented with a careful examination of the persistence of the shocks and a close monitoring of their impact on in ‡ation expectations. It is found that the latter are formed on the basis of past in ‡ation, but that the in ‡ation target also plays a role. In addition, in ‡ation expectations partially move with "supply"shocks, an outcome that re ‡ects a degree of credibility of monetary policy.