Borradores de Economía - Consumer Prices Trends in Colombia: Detecting Breaks and Forecasting Inflation
The series Working Papers on Economics is published by the Office for Economic Studies at the Banco de la República (Central Bank of Colombia). The works published are provisional, and their authors are fully responsible for the opinions expressed in them, as well as for possible mistakes. The opinions expressed herein are those of the authors and do not necessarily reflect the views of Banco de la República or its Board of Directors.
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Abstract
Colombia’s annual infation reached 13.3% in March of 2023, the highest rate since the start of the infation-targeting regime for monetary policy in 2000. However, some groups in the basket show signs of lower infation, while others show higher infation. The persistence of this trend is a matter of active debate that involves analyzing the trend component of both year-to-year and month-to-month changes in the price indices. This paper employs time series models to identify infation shift levels based on the 188 price indices in the basket. We categorize trend breaks as positive or negative and further classify them into tradable versus non-tradable, core versus regulated, and other CPI categories. Using trend models that incorporate these breaks, we forecast total and group infation. Our results show that including trend breaks enhances prediction accuracy for monthly annual infation across all time horizons
