Inflation carried over from the previous year and rising prices in commodities contributed to exceeding the target, says BC

The president of BC (Central Bank), Roberto Campos Neto, said in an open letter released this Tuesday (10) that the inflation target burst for the second consecutive year is due to five main factors, such as inflation inherited from the previous year, global phenomena and recovery in demand for services and employment after the reopening of the economy.

As for the influence of the international scenario, aggravated by the outbreak of the War in Ukraine, the BC cited the rise in commodity prices, especially oil, imbalances between demand and supply of inputs, bottlenecks in global production chains and shocks in food prices, resulting from climate issues.

“The significant rise in inflation in 2021 and 2022 to levels above the targets was a global phenomenon, reaching most emerging countries,” he said.

In addition to the inertia of the previous year’s inflation, the BC also highlighted the deterioration of expectations, affected by inflationary pressures and the perspective of maintenance or propagation of its factors.

According to the monetary authority, its projections are that inflation accumulated in four quarters will continue the downward trend throughout 2023, ending the year at a level lower than that of 2022. “The scenario is one of convergence of inflation to its targets “, he stated.

The BC mentioned that, in the December 2022 inflation report, projections point to inflation of 5% in 2023 (a drop of 0.8 percentage points in relation to the inflation observed in 2022), 3% in 2024 and 2.8% in 2025, against inflation targets of 3.25%, 3% and 3%, respectively.

“In this scenario, in 2023, inflation still remains above the target, mainly due to the hypothesis of the return of federal taxation on fuels in that year and the inertial effects of inflation in 2022”, he said.

“These effects are counterbalanced by monetary policy, although not fully, due to the temporal differences between the impacts of shocks, of a shorter term, and the effects of monetary policy, more concentrated in the medium term”, he added.

The text addressed to the Minister of Finance, Fernando Haddad (PT), was released after the IBGE (Brazilian Institute of Geography and Statistics) reported that official inflation in Brazil, measured by the IPCA (National Index of Prices to the Consumer Ample), closed 2022 with an accumulated increase of 5.79%.

The IPCA lost strength compared to 2021, when it had risen 10.06%, but was above the target set by the CMN (National Monetary Council) for last year, of 3.5%, with a tolerance of 1.5 percentage points for more (5%) or less (2%).

Throughout 2022, the IPCA reached 12.13% in the accumulated 12 months until April. The loss of breath, with three consecutive months of deflation (fall in prices), from July to September, was driven by cuts in taxes on fuel and other items.

The reduction in the tax burden took place in the midst of Jair Bolsonaro’s (PL) re-election plans, which were frustrated by his defeat by Luiz Inácio Lula da Silva (PT) at the polls.

According to the Central Bank, several factors collaborated to reduce the deviation of inflation from the target. In addition to the tax issue, Campos Neto mentioned the behavior of the electricity flag, which went from water scarcity to a green flag, the exchange rate appreciation and the product gap in the negative field.

The output gap measures the difference between potential and actual economic growth, and the labor market situation is one of the thermometers to estimate this difference.

“In this sense, the role of tightening monetary policy in containing inflation is highlighted. Monetary policy, which in 2021 had already moved from extraordinarily high stimulus to contractionary territory, advanced substantially in contractionary territory in 2022,” he said. .

In the document, Campos Neto reiterated that, to ensure the return of inflation to the established limits, the Central Bank has defined the target for the basic rate (Selic) and “will continue to do so”.

In December, at the last meeting of the year, the Copom (Monetary Policy Committee) kept the interest rate level unchanged for the third consecutive meeting and ended 2022 with the Selic rate at 13.75% per annum.

The letter written by Campos Neto is the seventh since the creation of the inflation targeting system, in 1999, and the second authored by the current BC president. In the text released in January last year, addressed to former minister Paulo Guedes, the head of the municipality attributed the burst of the 2021 inflation target to the global phenomenon.

Campos Neto’s predecessor, Ilan Goldfajn, had to justify himself for having let inflation stay slightly below the minimum limit established for the 2017 target.

In the other cases, referring to the years 2015, 2003, 2002 and 2001, the upper limit of the inflation target was exceeded. Among the various causes were the devaluation of the real, the investor confidence crisis, the global crisis and price realignment.

Before Campos Neto, Henrique Meirelles was the only BC president to have written two letters throughout his long term, which lasted from January 2003 to December 2010.