Colombia Inflation Hits 6.4% as Central Bank Prepares to Hike Rates Again

Colombia is dealing with some of the highest inflation in Latin America. Consumer prices rose 6.4% year over year in February, well above the central bank's target range of 2% to 4%. And it's probably going to get worse before it gets better.

The Central Bank of Colombia, known as BanRep, meets on Tuesday, April 1. Markets are expecting a 100 basis point rate hike, which would push the policy rate to 11.25%. That would make Colombia one of the most hawkish central banks in the world, with rates higher than Turkey, Brazil, or Mexico.

What's driving Colombia's inflation? A combination of factors, but the biggest is the 23% minimum wage increase implemented in January. President Gustavo Petro pushed through one of the largest wage hikes in Colombian history, arguing that workers needed relief from years of rising costs.

The problem is that when you raise the minimum wage that much, businesses immediately pass the costs on. Restaurants raised menu prices. Retailers increased prices on goods. Service companies bumped up fees. Wages and prices are chasing each other higher in a classic spiral.

Food inflation is running at 8.2%, driven by droughts that hurt coffee and vegetable production. Colombia is a major coffee exporter, but domestic coffee prices have soared as farmers sell more abroad where they can get better prices. Colombians are paying more for their own coffee.

Transportation costs jumped 7.8% as fuel prices rose along with global oil markets. Bogotá, Medellín, and Cali all saw public transportation fares increase. That hits lower income workers particularly hard because they rely on buses and trains for daily commutes.

Housing inflation is at 6.1%, driven by rising rents in major cities. Urban migration continues as people move from rural areas seeking jobs. Demand for housing in cities is outstripping supply, pushing rents higher.

The central bank has been raising rates aggressively for over a year. They started at 3.5% in mid 2023 and have hiked repeatedly to the current 10.25%. The plan is to choke off demand by making borrowing more expensive. If people and businesses can't afford to borrow, they spend less, and that should bring inflation down.

But it's a painful process. Mortgage rates in Colombia are now above 14%. Credit card interest rates are approaching 30%. Small businesses that depend on bank loans to buy inventory or equipment are getting crushed. Some are closing down rather than paying such high borrowing costs.

Unemployment ticked up to 11.3% in February, reflecting the slowdown. Job growth is concentrated in informal sectors like street vending and gig work. Formal sector jobs, which offer benefits and stability, are stagnant or declining.

Consumer confidence is at a five year low. Colombians are worried about their economic prospects. They're cutting back on discretionary spending, eating out less, postponing big purchases. That's creating a negative feedback loop where weak demand leads to slower growth, which leads to more unemployment.

The Colombian peso has been volatile. It weakened to 4,350 per US dollar in March, down from 4,100 in January. A weaker peso makes imports more expensive, which feeds inflation. Colombia imports a lot of manufactured goods, electronics, and machinery. All of that costs more when the peso falls.

BanRep is signaling that rates will stay high deep into 2026. They want to make absolutely sure inflation is broken before they even think about cutting. But the risk is that they overtighten and push the economy into recession.

For Colombian households, this is a grinding situation. Wages went up 23%, which sounds great. But inflation at 6.4% and rising interest rates eat away most of that gain. Real purchasing power isn't improving much, if at all.