Opinion – Cecilia Machado: It will take an effort to repeat the 2016 and 2017 disinflation

The last time we had inflation as high as it is now was in January 2016. The IPCA accumulated in 12 months registered 10.71%, and from there until August 2017 it took another 18 months until the 2.46% mark reached, the lowest level since 1998.

Between 2016 and 2017, we experienced a very successful disinflationary process, which brought inflation back to the center of the target and anchored expectations through a set of fiscal and monetary measures that came in the wake of the replacement of the government and its staff. Today, the disinflationary effort needed is of equal magnitude, and it may be possible to replicate the successful experience of the past once more. Perhaps. This time it could also be different.

From an optimistic angle, many of the shocks now hitting our economy are external in origin. There were numerous problems in the global supply, arising from the rupture of production chains, the lack of inputs and logistical difficulties for the production and distribution of goods. Concomitantly, goods became more in demand than services, in response to the need for social distance.

The price of tradable goods followed the rapid recovery of developed economies, being passed on to domestic prices through an exchange rate that remained depreciated during the year. And the energy crisis in Europe, China and the US was imported to Brazil through the increase in the price of commodities such as oil.

Also positive is the perspective that the power of monetary policy is much stronger now, since we had the end of subsidized credit from the BNDES and the creation of the long-term rate (TLP), which led to managed loans at interest rates close to those practiced. in the market.

There was also an intense expansion of the private credit market, which increases the economy’s sensitivity to changes in interest rates. Finally, the recent independence of the Central Bank consolidates the institution’s credibility so that the fight against inflation continues to follow strictly technical and not political criteria.

But there are also downsides to the current disinflationary process. After all, the experience of 2016 was particular with regard to the redirection of the economic policy that accompanied the change of government.

On the fiscal front, the new government established the ceiling rule in a constitutional text. The spending limit brought predictability to the fiscal trajectory, ensuring the sustainability of the public debt and macroeconomic stability, with the consequent appreciation of the exchange rate. In the recent processing of the PEC dos Precatórios, in the Chamber and in the Senate, the ceiling was completely uncharacterized as a fiscal anchor, and today the medium and long-term fiscal risks are back on the scene.

In the conduct of monetary policy, the new collegiate had the strength to remain firm in the fight against inflation, without the need to defend any previous decisions that might have led to that inflationary dynamic.

In 2016, there were still expansionist international financial conditions, called by the Central Bank of Brazil at the time a benign interregnum: the high liquidity maintained by the central banks of developed countries gave space to the performance of central banks of emerging countries. At the present time, the process of withdrawing stimuli in advanced countries is already evident, as is the case in the USA.

Finally, the electoral scenario for 2022 remains polarized, and there is enormous uncertainty about the implications of the results of the polls for the conduct of economic policy. Until the doubts about the candidates’ position regarding fiscal responsibility and the necessary reforms are resolved, we will have difficulties in re-anchoring inflation expectations.

Recently, some indicators have started to show signs that a declining inflation trajectory would be underway. The drop in the price of some commodities, such as oil, gives signs of hope. However, the disinflation process is full of nuances, difficulties and uncertainties, and convergence will require much more than a return to normality and an end to limitations on the supply side.

It is a game that is far from being won, and the success of the past will only be repeated with hard work, effort and perseverance.