Explaining Inflation in Colombia : A Disaggregated Phillips Curve Approach

We study inflation dynamics in Colombia using a bottom-up Phillips curve approach. Thisallows us to capture the different drivers of individual inflation components. We find that thePhillips curve is relatively flat in Colombia but steeper than recent estimates for the U.S.Supply side shocks play an important role for tradable and food prices, while indexationdynamics are important for non-tradable goods. We show that besides allowing for a moredetailed understanding of inflation drivers, the bottom-up approach also improves on anaggregate Phillips curve in terms of forecasting ability. In the baseline forecast scenario, bothheadline and core inflation converge towards the Central Bank's inflation target of 3 percentby end-2018 but these favorable inflation dynamics are vulnerable to large supply shocks