Assessing inflationary pressures in Colombia

The assessment of inflationary pressures in Colombia has faced two important challenges inthe present decade. The rst one occurred in 2006 and consisted of detecting an overheatingeconomy in the midst of fast growing investment and increasing measured productivity. Thesecond challenge took place in 2007-2008, when the economy was hit by a number of "supply"shocks and core inflation indicators sent diverging signals about the transmission of thoseshocks to macroeconomic ination. An evaluation of the rst episode shows that traditionalindicators of productivity and unit labor costs were not su¢ cient to identify "supply" and"demand" movements. Thus, policymakers had to rely on a wider array of variables to gaugethe state of the economy.Regarding the second episode, an evaluation of core ination indicators according to stan-dard criteria suggests that no particular measure seems to be clearly superior to the others.Hence, the assessment of inflationary pressures should not rely only on one or few core inationindicators, since some signals could be picked by some measures and not by others. Moreover,this result suggests that the analysis of core ination measures must be complemented witha careful examination of the persistence of the shocks and a close monitoring of their impacton inflation expectations. It is found that the latter are formed on the basis of past inflaation,but that the inflation target also plays a role. In addition, ination expectations partiallymove with "supply" shocks, an outcome that reects a degree of credibility of monetary policy.(This abstract was borrowed from another version of this item.)