Gasoline price increases will translate broadly into additional inflationary pressures, even as global price disruptions moderate going into 2023
Recent weeks have brought a series of domestic developments in Colombia, pointing to a longer downward path for domestic inflation. The Colombian government recently announced it would steadily ease domestic gasoline subsidies, which have kept prices largely stable during 2022. The Gustavo Petro administration cited the substantial fiscal cost of the subsidies in making the decision. Inflation in September also came in higher than expected, at 11.4% YOY as food prices and services remained key sources of price pressures. The Petro administration’s decision on the 2023 minimum wage hike is not yet clear; however, it is likely that the government will raise the wage level by anywhere from 10% to 20%, with a more aggressive hike bringing further inflationary pressures. Clients should expect inflation to remain higher for longer, with annual inflation averages for 2022 of 9.9% and approximately 8% for 2023, bringing slowdowns in consumer demand and growth. At the same time, the reduced fiscal pressures from the subsidies will open further B2G opportunities in line with the Petro administration’s spending plans.
Overview
The government will raise the price of domestic gasoline by COP 200 each month, beginning in October. However, the government also stated that the change would not affect diesel prices. At the current elevated global oil price level, Colombia’s gasoline subsidies come with a fiscal cost of approximately COP 10 trillion each quarter, which is roughly half of the revenue target of the tax reform under debate in Congress.
Our View
The easing of gasoline subsidies is a necessary step to realizing the Petro administration’s plans to significantly expand public spending programs. Nonetheless, the price increases will translate broadly into additional inflationary pressures in Colombia, even as global price disruptions moderate going into 2023. The potential for an aggressive minimum-wage hike also suggests further inflationary challenges on the policy side. These factors, along with inflation exceeding previous market expectations, point to inflation remaining higher for longer, translating into a more substantial threat for consumer demand destruction in 2023.
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