Persistence of service inflation keeps BC cautious with interest rates

The challenging trajectory of services inflation –accumulated in the 12 months through September at 8.5%, above the 7.17% advance of the IPCA (Broad Consumer Price Index)– is behind the Central Bank’s caution about fees.

Since interrupting the monetary tightening cycle (high interest rates) with the maintenance of the basic rate (Selic) at 13.75% per year, the BC has emphasized the message that it will remain vigilant.

For economists heard by the Sheet, there is a scenario of discomfort for the monetary authority with the resistance of prices in this category. Still, analysts see the first signs of relief in the sector and estimate a loss of breath in the next year.

Considering only the monthly result, services inflation accelerated 0.4% in September, compared to 0.28% in August. What contributed the most to this data was the 8.22% increase in air ticket prices.

Also noteworthy are services related to tourism, such as accommodation (2.88%) and tourist packages (2.3%). Another segment that influenced the result was the 6.14% increase in transport rates per application.

The rise in the personal expenses group (0.95%) was driven by the increase in banking services (1.56%). But services related to the area of ​​aesthetics – such as manicure (1.03%), hairdressing and barbering (0.97%) and waxing (1.31%) – also pressured prices in September.

In the case of underlying services, the overall balance was one of deceleration, changing from 0.73% in August to 0.61% in September.

Among the services with a drop in prices from August to September, the highlights are internet access (-10.55%); telephony, internet and pay-TV combo (-2.70%); and vehicle rental (-2.02%).

Demand for services has been gaining strength with the reduction in restrictions on the movement of people during the Covid-19 pandemic as sanitary conditions have improved.

“The pandemic ended up generating a change in the mix of preferences. When they were closed at home, people bet on the purchase of durable goods – appliances, for example – or in civil construction”, said Fábio Romão, economist at LCA Consultores. “There is a clear preference today for services, which ends up granting some readjustments”.

According to the expert, the pent-up demand is financed, in part, by the forced savings of the wealthiest strata of the population during the pandemic period.

Tatiana Nogueira, economist at XP Investimentos, points out that service costs lagged during the pandemic, which explains the recent acceleration in the prices of some items. “The owners of establishments preferred to leave the prices still low so as not to lose the minimum demand they still had”, she recalls.

She also highlights that, in addition to the reopening of the economy, the service sector has benefited from the improvement in the labor market –the unemployment rate in Brazil dropped to 8.9% in the quarter through August– and the gradual recomposition of family incomes. .

For Nogueira, services inflation will remain under pressure for a longer period, while industrialized goods prices already show a clearer deceleration. “We see a scenario of discomfort for BC”, she said. “Much of the BC’s caution lies precisely in this still challenging trajectory of the services group”, she added.

In the quarterly inflation report, released in September, the BC highlighted that services inflation remained resistant, amid “surprisingly positive” results from economic activity and the labor market.

Considering the quarter ended in August, the monetary authority noted that services inflation was the only one that had not cooled in the period, although it recognizes that tax cuts have driven the decline in fuel and electricity prices.

“Underlying services inflation was more pressured, reflecting robust demand for services, pass-through of past inflation and high wages,” he said.

“It is also worth noting the acceleration in the prices of labor-intensive services, particularly [no item] housekeeper. Telecommunications services – which have been subject to tax cuts – have so far seen a lower than anticipated price decline,” he continued.

The director of economic policy at BC, Diogo Guillen, commented in the presentation of the report that services remained resilient and highlighted the inertial nature of this price category, which takes longer to dissipate inflationary shocks.

Despite the high level accumulated in 12 months, Rafaela Vitória, Inter’s chief economist, saw inflation in services as good news in the reading of the September indicator.

“Service inflation has been losing strength with the regulation of demand in the sector. Not only is the effect of repressed demand in the first half dissipating, but the supply of services has been growing,” he said.

She recalls that the segment is usually more resistant and reacts to monetary policy in a delayed manner. For Vitória, service inflation should continue to fall, albeit slower in relation to the other groups, and the Copom [Comitê de Política Monetária] hit the decision to end the cycle of high interest rates in September.

In the communiqué of the last meeting, the committee emphasized that it would assess whether the strategy of maintaining the Selic for a “sufficiently prolonged” period would be able to ensure the convergence of inflation.

At the end of September, BC President Roberto Campos Neto said that it is still too early for the monetary authority to think about a drop in interest rates and that an initial cut in the Selic rate in June 2023 is compatible with the objective of bringing inflation to the around the goal.

“There are risks to the projections, we are vigilant. Depending on the risk, we may even go back to raising interest rates”, said Campos Neto.

Romão, from LCA, estimates that service inflation will have a shorter breath compared to the movement observed between 2011 and 2014. This is because, according to the economist, it now depends on short-term behavioral issues and with limited funding.

“For next year, I have reason to believe that service inflation will lose strength,” he said. “Even because we are going to spend a relevant part of this year and next year with a double-digit interest rate, which evidently ends up taking strength from economic activity and mitigating the evolution of inflation”.