Financial Metrics · Intermediate level · 3 min read ·
How does inflation affect the project's returns?
Inflation is the general rise in prices. In Colombia it is measured with the IPC, the consumer price index (CPI), which DANE publishes every month. In a project it touches two sides: it can lift revenue, if the tariff is indexed to the CPI, and it also raises operating costs.
In 30 seconds
- The CPI measures how prices of what households consume change; DANE publishes it monthly.
- A nominal increase is only real if it beats inflation over the same period.
- In a project, inflation moves both indexed revenue and OPEX.
Why should you care?
A peso today doesn't buy what a peso will buy in five years. To read any multi-year projection you need to separate what truly grows from what only rises with prices.
- You tell a nominal increase apart from a real one.
- You understand why some energy contracts adjust the tariff with the CPI.
- You know inflation also makes the operation more expensive, not just revenue higher.
Think of it as walking on a treadmill that runs backwards
If you walk forward on a belt that runs backwards, you only move ahead by however much faster you walk than the belt. Inflation is that belt: an increase in pesos only takes you further if it moves faster than prices.
How does inflation work?
- 1
DANE measures prices
Every month it records the prices of a basket of goods and services households consume in cities across the country.
- 2
The change is calculated
The CPI's twelve-month change is the annual inflation used to adjust contracts and projections.
- 3
Tariffs and costs are indexed
A CPI-indexed contract raises its tariff each year by that change; many operating costs rise in a similar way.
- 4
Nominal is compared with real
Inflation is taken out of the increase in pesos to see how much purchasing power grew.
The formula
Real growth = (1 + Nominal growth) ÷ (1 + Inflation) − 1
- Nominal growth
- = how much a figure rose in pesos
- Inflation
- = the CPI's change over the same period
An example with numbers
As plain arithmetic, unrelated to any project: a project with a CPI-indexed tariff and costs that also rise with it, in a year with 5% inflation, in units.
| Revenue year 1 | 100 |
|---|---|
| Revenue year 2 (indexed, +5%) | 105 |
| OPEX year 1 | 20 |
| OPEX year 2 (+5%) | 21 |
| Result year 2 (year 1: 80) | 84 |
The result rises 5% in pesos, but since prices rose just as much, purchasing power stays the same. Indexation protects real value; it doesn't increase it.
Where do you see it at Circular Urban?
In solar projects with a CPI-indexed energy contract, the tariff rises with inflation and OPEX is projected with it too; if the project sells surplus at the spot price, it depends on how that market moves. In hospitality, nightly rates follow the market and costs rise with prices. Projections are non-binding references.
- Each solar project sheet, in Financial Models: LCOE (nominal) and OPEX Year 1.
- Each solar project sheet, in Risks & Mitigants.
- Each operating project's sheet, in How the operation is going: average monthly ADR.
What changes in your finances once you get it
You measure in real terms
Before celebrating an increase, you subtract the inflation of the same period.
You check your income
If your income rises less than the CPI, your purchasing power fell even though you get more pesos.
You follow the official figure
DANE publishes the CPI every month; it's the reference for rents, contracts and projections.
Common mistakes
- Myth
If my income rises 5%, I'm 5% better off.
- In reality
If inflation was also 5%, your purchasing power stayed the same. What counts is the increase above inflation.
- Myth
A CPI-indexed tariff makes the project grow more every year.
- In reality
Indexation aims to keep revenue's real value. If costs also rise with the CPI, the real result holds steady; it doesn't grow because of it.
- Myth
High inflation is always good for an indexed project.
- In reality
It lifts indexed revenue, but also OPEX and other costs. The net effect depends on how much each side weighs.
Test yourself
A result rose 8% in pesos in a year with 5% inflation. Roughly how much did it grow in real terms?
Keep learning
Helps to know first
This content is educational. Every participation carries risks inherent to the project, including the possibility of partial or total loss, and results are subject to each project's actual performance.
