After two long-suffering years of corrosive inflation, there is at least the simple consolation that the worst is finally behind us. I explain. The IPCA reached its peak in April (12% accumulated in twelve months). With the significant drop in prices last month (0.68% deflation in July), the annual inflation rate has dropped to 10% and should continue to fall slowly, gradually and erratically towards the inflation target range. The month of August should show another price drop, which should accentuate the trend of convergence to the targets throughout 2023.
Brazilian inflation in 2022 will possibly be lower than in the United States and Europe, something I don’t remember ever having happened. The variation of the consumer price index could close below 7% against estimates of 8% in the United States, 7.5% in the eurozone and 13% in the United Kingdom.
However, such high inflation can never be celebrated. Always and everywhere, the simplest lose. Purchasing power has been continually eroded by inflation and economic policy disasters: the average Brazilian’s income was US$12,000 in 2014 and is now around US$8,500. We continue to walk against history and relativize inflation.
It will be the second year in a row that the top of the goal has burst. The exclusive responsibility for keeping inflation within the target rests with the Central Bank, a body with complete operational autonomy. Despite well narrated rationalizations and justifications, the BC has not fulfilled its mandate. Under the current rules, our only recourse is to hope that it meets the target set by the CMN.
Many argue that the good result of inflation in July was exclusively due to the reduction of taxes on fuel and energy, which constitutes an unsustainable measure given the impact on state tax accounts. Does not proceed.
First of all, unsustainable doesn’t seem to be. On August 5, rules were enacted to compensate the states. The Union will compensate for any ICMS collection losses (above 5% of total aggregate ICMS loss, not just fuel and energy) in 2022 compared to 2021.
Depending on the federation unit, the compensation may not even be activated, since the increase in fuel prices in the first half of the year boosted revenue. Therefore, no expenditure considered essential will need to be reduced.
Congress acted correctly in imposing a cap on the ICMS tax rate on fuel and energy. States had been raising taxes on these essential and inelastic products for decades. The rate was 32% in Rio de Janeiro, for example. As the ICMS is a tricky tax that integrates its own calculation base, the effective rate was an absurd 47% of the value of the fuel.
Additionally, inflation had been cooling down for a few months. The percentage of items that rose in price in the IPCA basket – the diffusion – had been falling for four consecutive months. And core inflation (a mix of indices that exclude volatile items like food and energy, among others) had also been falling since May.
Finally, since June the prices of oil derivatives have fallen sharply on the international market, and the real has been appreciating. Petrobras, by virtue of its pricing policy, has reduced prices. In other words, most of the reductions since June refer to the external scenario and the exchange rate, not just the tax reduction.
The BC was imprudent in reducing the Selic in 2019 and then in reducing it to 2% in 2020. Consequently, we were the first country to experience an explosive rise in inflation. On the other hand, although belatedly, the BC made the necessary adjustment (the Selic today is 13.75%).
It is quite possible that we are one of the first countries to break the dragon’s neck. The Brazilian thanks you.
I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
