Cablegate: Is the Cost of Living Increasing in Colombia?

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UNCLAS BOGOTA 003350

SENSITIVE
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EEB/OMA FOR A. SIROTIC
TREASURY FOR M. EWENS

E.O. 12958: N/A
TAGS: ECON EFIN CO
SUBJECT: IS THE COST OF LIVING INCREASING IN COLOMBIA?

REF: BOGOTA 3076

1. (U) SUMMARY. Inflation figures over the last 12 months
indicate an acceleration of an already increasing cost of
living in Colombia. Analysts expect the consumer price
inflation to come in at double the target for 2008, and
prices for producers have risen even faster. While a
month-long depreciation of the peso against the dollar has
given exporters and expatriates living in Colombia some
breathing room, more nuanced observers worry that more
expensive imported inputs will further fuel inflation. END
SUMMARY.

PRICES FOR PRODUCERS OUTPACE THOSE FOR CONSUMERS
--------------------------------------------- ---

2. (SBU) Colombia's Consumer Price Index (CPI) rose by 7.9
percent for the 12 months through August, 2008, well above
the Central Bank's 3.5 - 4.5 percent inflation target for the
year. While CPI growth has risen steadily, some analysts
have expressed more concern recently about the growth in the
Producer Price Index (PPI), which hit 9 percent for the last
12 months. In contrast, the annual growth in 2007 of the PPI
reached only one percent. German Verdugo, Research Manager
of Correval Brokerage House, attributed the increase in the
PPI to a lag in the effect of higher commodity prices as well
as the more recent weakening of the peso. Several analysts
believe that businesses will soon have to pass on their
higher costs to consumers.

RECENT PESO DEPRECIATION: EXPORTERS AND EXPATS CHEER...
--------------------------------------------- ----------

3. (U) Colombia has seen a significant appreciation of the
peso over the last five years in nominal as well as real
terms (reftel). While Colombia's exporters have made their
displeasure with the strong peso well known, a less vocal
group has been expatriates, who have seen their
dollar-denominated salaries whither against the strengthening
local currency. A Colombian domestic employee making minimum
wage saw her peso-denominated salary increase by 40 percent
between 2003 and 2008. An American expatriate employer of
that same domestic employee saw the dollar-denominated cost
of the worker's salary increase by 120 percent. Similar
increases in real estate and other sectors have translated
into a steep increase in the cost of living for expatriates.

4. (U) From August 5 to September 5, the peso depreciated by
12.2 percent (in nominal dollar/peso terms) to 2017.53
pesos/dollar, its weakest rate since December, 2007. Javier
Diaz, President of the National Association of Foreign Trade
(Analdex) said that exporters certainly welcomed the boost to
their price competitiveness, but cautioned that no one could
predict whether and how long the weaker peso would last. He
offered his opinion that the equilibrium exchange rate
appeared closer to 2000 than the 1700 seen in June and July.
Diaz noted that Colombian exporters still lack a culture of
using futures contracts and other derivatives to lock in
favorable rates.

...BUT WILL IT PASS THROUGH TO DOMESTIC PRICES?
--------------------------------------------- --

5. (SBU) While exporters and expats welcome 2000 pesos per
dollar, some fear that a weaker peso will result in
higher-priced imported inputs and increased inflation.
Analysts estimate that the peso's depreciation already
canceled out the recent fall in commodity prices and its
ability to reduce inflation. Nonetheless, it remains unclear
whether the higher cost of imports will pass through to
domestic prices. Gonzalo Palau, Director of Post Graduate
Studies at Rosario University's Economics Department,
estimated the exchange rate pass-through as fairly high and
predicted that a weaker peso would indeed fuel inflation. He
noted that the strong peso of the last five years was a
primary (and largely unrecognized) reason why inflation was
not higher over that period. In Palau's view, workers have
already begun to expect higher inflation, which, coupled with
employers facing higher costs, sets the stage for very
contentious annual minimum wage negotiations in December.
The outcome of these talks (which have indirect effects on
prices throughout the economy) may well determine how much

Colombians see their cost of living rise.
NICHOLS

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