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Viewing cable 08BOGOTA3350, IS THE COST OF LIVING INCREASING IN COLOMBIA?

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Reference ID Created Released Classification Origin
08BOGOTA3350 2008-09-08 22:23 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Bogota
VZCZCXYZ0001
RR RUEHWEB

DE RUEHBO #3350/01 2522223
ZNR UUUUU ZZH
R 082223Z SEP 08
FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC 4570
INFO RUEHCV/AMEMBASSY CARACAS 0982
RUEHLP/AMEMBASSY LA PAZ SEP LIMA 6539
RUEHZP/AMEMBASSY PANAMA 2286
RUEHQT/AMEMBASSY QUITO 7220
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
UNCLAS BOGOTA 003350 
 
SENSITIVE 
SIPDIS 
 
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