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We have heard a lot about the word inflation, how over the years our money loses more value and how some nations suffer more than others. But what does this word really mean? How does it affect us in our daily lives, and why is Colombia one of the countries with the highest inflation rates? In this blog post we’ll answer these questions and more.
Inflation is a natural phenomenon in any economy, in which the price of goods and services increases over time. For people like you or me, it can have negative effects on our quality of life. If you live in a country like Colombia, the devaluation of the Colombian peso is commonplace and has a significant impact on your purchasing power.
"We all believe that inflation is like one of those data they give in the news that is for great economists, but the truth is that it doesn't. It affects us all because with the same money we will buy less things, because income does not necessarily go up,” says Diego Berlan, professor of Personal Finance at CESA University. “The poorest are the ones who end up suffering much more, because the prices of everything goes up, like public transportation, intermunicipal transportation and basic food basket. Not only bread, milk or eggs but all food supplies, and also clothing, recreation and sports.”
When the amount of money you have today suddenly is worth less than it was yesterday, you may find yourself in a position where you are unable to afford the same goods and services as before. For example, in 1970 you could rent a house for $1,700 Colombian pesos; now, you’re lucky if this amount covers some chewing gum or candy.
Simply put, inflation occurs when demand for goods outpaces the supply of what is available. If we look at the events of the past year, we have even more reasons to blame, such as the increase in international oil prices, the global container crisis, the war in Ukraine and the shortage of raw materials, fertilizers and other basic inputs for agricultural production. And in the specific case of Colombia, it is also attributed to the political uncertainty covering the new mandate of President Gustavo Petro and his new economic policies.
In other countries like Argentina and Venezuela, it can also be attributed to factors such as oil and import dependence, intervention by governments in monetary policies, elimination of independent central banks and promotion of expropriation policies, added to the exaggerated growth of the external debt and the global economic crisis of 2008 and 2018. Add the ravages of the coronavirus pandemic in 2020 and you have the perfect recipe for hyperinflation.
Since October 2021, inflation has been rising in Colombia. In 2022 inflation peaked at 13.12 % and in the second month of 2023 the most depreciated currencies in the world were the Lebanese pound (-89.91 %), the Russian ruble in second place (-6.09 %) and the Colombian peso (-5.14 %).
Bloomberg also revealed that among Latin American currencies, the Colombian peso depreciated the most against the dollar in February 2023,followed by the Argentine peso (-2.99%) and the Brazilian real (-2.76%).
As a result, the Colombian peso continues to be one of the most affected in the region. This can be seen in the following chart where we see the value of $100 over time, taking into account the change in inflation x. All figures are equivalent in terms of purchasing power, which means that for each year the same goods or services could be purchased with the amount of money indicated.
It’s jarring to see the change over time. In 1971 with $1,000 you could rent a state-of-the-art house, but in 2022 this figure wouldn’t be enough to cover the minimum wage.
Inflation is the enemy of our pocket, and although in matters of economy the state and economic policies of a country have the majority of say, as people and workers we can also seek actions that allow us to safeguard our money and “hacer el quite” to this phenomenon.
