Brazilian inflation is below US inflation for the first time since 2007

For the first time since 2007, Brazil’s consumer price index is below US inflation. For now, the difference in favor of the Brazilian indicator is concentrated in the items that were exonerated on the eve of the presidential elections: fuel and energy. Food and other price inflation remains higher here.

This is a scenario that should be maintained until mid-2023, when the rise in prices in Brazil should once again exceed the US index, according to projections by economic analysts.

The IPCA (consumer price index) rose 7.17% in the last 12 months, while the American CPI (consumer price index) rose 8.2% in the same period.

Food inflation is still slightly higher in Brazil (11.7%) than in the US (11.2%). Service prices are up 8.5% here and 6.7% for Americans.

While gasoline and electricity rose nearly 20% in the US, there was deflation of the same magnitude in Brazil in 12 months.

Market inflation projections for 2022 are close to 5.5% for the IPCA and 7% for the US CPI. For 2023, the perspective is that the US index will register a lower increase (3.5%) than the Brazilian index (5%).

In addition to the exemptions, some of which have an expiry date, another explanation for the difference lies in monetary policy.

The basic interest rate in Brazil (Selic) started to rise in March 2021, it is currently at 13.75% per annum and is expected to remain so until the middle of next year, despite the expected drop in inflation in the coming months. This represents a real interest rate (difference between the projections for the Selic and inflation) above 8% per year.

In the US, the rate started to rise a year later and went from 0.50% to 3.25%. That is, real interest rates are still negative.

“Monetary policy is working here in Brazil as expected. If the BC started raising interest rates a year before the Fed [BC dos EUA], it would be expected that Brazilian inflation would also decelerate earlier than the American one. As this was not always true, we can also consider this a point of celebration for the IPCA result in the accumulated in 12 months”, says Luis Otávio de Souza Leal, chief economist at Banco Alfa de Investimentos.

The other times when inflation was lower in Brazil were in January 1999 and in a few months between June 2006 and November 2007. There were two periods in which price indices were down all over the world. The first case coincides with the time when the IPCA registered the lowest inflation in 12 months in recent history (1.65%), in the FHC administration, with a difference of only 0.5 point for the USA.

Alexandre Lohmann, economist at Constância Investimentos, states that the drop in raw material prices and the effects of tax exemptions on prices in other segments also helped to reduce core inflation and the IPCA diffusion rate. “The inflationary scenario is improving more than expected.”

Lohmann states that the 12-month accumulated inflation rate should be close to 2% at the end of the second quarter of 2023, when the index will be without the months most affected by the beginning of the Ukrainian War, but still with the influence of ICMS cuts. As a result, pressure should increase for the Central Bank to start cutting interest rates before what has been signaled by the institution.

The drop in inflation in Brazil in recent months can be explained by a combination of reduced taxes, lower commodity prices in reais and the effect of monetary policy.

On the other hand, service inflation, which accumulated in the 12 months through September, rose by 8.5%, gained strength with the end of restrictions on the movement of people during the pandemic and has worried the Central Bank of Brazil.