Inflation in Brazil falls compared to the world, but is still strong because of goods

The drop in fuel prices helped consumer inflation in Brazil to approach the average of the largest developed and emerging economies, something that had not happened for two years, according to a survey by the bank UBS BB.

However, the country still suffers from strong pressure from the prices of industrial goods, and services inflation also resurfaced as a factor of concern, after two years running below the average of 13 economies analyzed by the financial institution. Among them, the USA, Eurozone, Mexico, India, Russia and Chile.

Since July 2020, 12-month inflation in Brazil has remained above the average of these economies. Only in April of this year did this difference begin to fall consistently. After peaking at 5.62 percentage points in September last year, it was at 0.92 percentage points in July this year.

UBS BB expects the IPCA (consumer price index) to return to this average by the end of 2022. As a result, after ending 2021 with the highest inflation in this group, Brazil should be ahead only of Canada and close to USA and South Africa this year.

Last year, a good part of this difference was explained by electricity and fuel prices, which are currently below this average, after the end of the water scarcity flag, with the additional charge on the electricity bill of consumers and companies, and measures adopted by the government to reduce fuel prices and taxes on these items during the election period.

Food has been among the villains of Brazilian inflation since 2020, but today it is in line with the average of the countries analyzed. The market’s expectation is a disinflation of these items, in the wake of the recent devaluation of the prices of commodities such as soybeans, wheat and corn. Internally, however, the item still weighs on the budget of Brazilians, especially the poorest.

A third component of this higher inflation was goods, which are currently the main responsible for an even higher IPCA here, although this difference has stopped growing. Services inflation, which was below average for about two years, is now starting to come in stronger in Brazil.

“the villains [da inflação] it was food and energy. Now, they will be the great heroes to make us better than the rest”, says Alexandre de Ázara, chief economist at UBS BB.

In a recent presentation, the president of the Central Bank, Roberto Campos Neto, showed that Brazil has the lowest energy inflation among ten economies that are also in the UBS BB sample. It still has higher food prices than Mexico, South Africa and India. And it is among the highest rates of inflation among emerging markets when considering only goods and services. Therefore, he believes that it is not yet time to cut interest rates.

In 2021, industrial goods were the items that most contributed to inflation in Brazil, as pointed out by the BC in the letter in which it justified the breach of that year’s target, highlighting the high prices of new and used vehicles and electronics.

In the first two years of the pandemic, there was an increase in demand for industrial goods, a drop in supply and problems in the supply of inputs and an increase in the cost of production. In Brazil, the situation was worsened by factors such as exchange rate depreciation, more expensive electricity and distance from producing markets.

André Braz, deputy coordinator of the Consumer Price Index at FGV, says that the country has suffered more from bottlenecks in the global production chain. He also cites as an example the lack of chips for vehicle manufacturing, which has driven up prices for new and used cars.

“In other countries, these bottlenecks were resolved more quickly. For us it lasted longer”, says Braz.

The chief economist at UBS BB believes that the normalization of this situation should contribute to a stronger drop in inflation in Brazil in relation to other economies. “Everyone wanted to buy goods, we had problems in the production chain, prices went up. USA and Brazil were the ones that suffered the most. Now it started to normalize in the USA and will normalize in Brazil”, says Ázara.

Data collected by the OECD show that Brazil had the third highest consumer inflation among 44 countries in July 2021. With the data expected for August, around 8.5% in 12 months, it should be close to the 25th position, next to USA, and end the year at this level