Brazil has 0.68% deflation in July, but food prices rise

With the impact of fuel and electricity reduction, Brazil had deflation (price drop) of 0.68% in July, informed this Tuesday (9) the IBGE (Brazilian Institute of Geography and Statistics).

It is the lowest rate ever recorded by the country’s official inflation index, the IPCA (Broad Consumer Price Index). The historical series began in January 1980.

The drop, however, was driven by only two groups (transport and housing) among the nine surveyed by the IBGE. The food and beverage segment, on the other hand, is still showing signs of scarcity and has accelerated again, which puts pressure on the pockets of the poorest.

Analysts consulted by the Bloomberg agency projected a less intense drop in July, of 0.65%. The IPCA had risen 0.67% in June.

High exceeds 10% in 12 months

Even with the monthly truce, the inflation index remains in double digits in the 12-month period. Until July, the high was 10.07%. On this basis of comparison, the advance had been 11.89% up to the previous month.

The accumulated IPCA has been in double digits, above 10%, for 11 months. That is, since September of last year.

Such a long streak has not occurred since the 2002 to 2003 range. At the time, the index was in double digits for 13 consecutive months, from November 2002 to November 2003.

The IPCA above 10% on the eve of the elections puts pressure on the Jair Bolsonaro (PL) government, which fears the effects of the loss of Brazilian purchasing power. To try to reduce the damage, the Planalto bets on cutting taxes, which is starting to impact part of the prices.

Fuels and energy go down, food goes up

The July deflation is the first since May 2020. At the time, the drop had been 0.38%, in a context of restrictions on economic activities with the arrival of the pandemic.

According to the IPCA, the July result was mainly influenced by the transport group, which had the most intense fall, 4.51%. The segment contributed with the biggest negative impact (-1 percentage point).

The drop in transport is mainly due to the 14.15% reduction in fuel prices. Gasoline dropped 15.48%. Ethanol, in turn, dropped 11.38%.

Gasoline, individually, contributed with the most intense negative impact among the 377 sub-items that make up the IPCA (-1.04 percentage points).

There was also a drop in vehicle gas prices, of 5.67%. The only fuel that rose in July was diesel oil (4.59%). The result was above the previous month (3.82%).

In June, Bolsonaro sanctioned a project that defined a ceiling for charging ICMS (state tax) on products and services such as fuel and energy. The measure begins to generate effects, according to the IBGE.

The housing group also retreated in July. The decrease was 1.05%, mainly related to the drop in residential electricity, of 5.78%.

“Yes, the ICMS reduction helped a lot”, said Pedro Kislanov, research manager, when asked in an interview with journalists.

Milk skips more than 25%

Food, on the other hand, became more expensive. The food and beverage group rose 1.30%, the biggest increase in July. The segment accelerated in relation to June (0.80%), contributing with 0.28 percentage point to the IPCA.

According to Kislanov, food inflation was driven by milk and dairy products. The off season and high costs put pressure on the sector, said the researcher.

Long-life milk jumped 25.46% in July. Prices had already risen 10.72% in the previous month.

Derivatives such as cheese (5.28%), butter (5.75%) and condensed milk (6.66%) also advanced. Another highlight came from fruit, with an increase of 4.40%.

On the side of falls, the biggest price declines came from tomatoes (-23.68%), potatoes (-16.62%) and carrots (-15.34%).

Projections for 2022 and 2023

With the tax cut, analysts have been reducing projections for inflation in 2022.

The estimate of the financial market dropped to a high of 7.11%, according to the median of the Focus bulletin, released on Monday (8) by the BC (Central Bank).

The side effect has been the increase in projections for 2023. According to Focus, the expected high for next year rose to 5.36%.

According to analysts, the loss of tax revenues brings risks to the fiscal framework, with possible negative impacts on inflation further down the road.

To try to contain the famine, the BC has been raising interest rates, which challenges the recovery of household consumption and makes productive investments by companies more expensive.

The IPCA is on track to break the inflation target pursued by the BC for the second consecutive year. In 2022, the center of the benchmark measure is 3.50%. The ceiling is 5%.

Shot in the pandemic

Inflation has returned to scare Brazilians due to a combination of factors throughout the pandemic.

There were increases in administered prices, such as fuel and electricity, in addition to food shortages and disruption of global industry input chains.

Inflationary pressure in Brazil was intensified by the devaluation of the real amid political turmoil.

In the first half of 2022, there was the added impact of the Ukraine War. The conflict put even more pressure on oil and part of agricultural commodities on the international market. Recently, these products have given signs of truce with fears of a global recession.