Lula against BC puts pressure on food and threatens its popularity

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Despite the drop in several prices in the economy, from raw materials to industrial goods, food inflation will be one of the main reasons for the Central Bank to possibly fail to meet the inflation target in 2023, for the third consecutive year.

The rise in food prices —which have risen by around 45% in the last three years— directly affects the largest share of voters for President Luiz Inácio Lula da Silva (PT), poorer families with incomes of up to two minimum wages, and may have an impact on their popularity.

On the eve of the second round in 2022, the PT had 61% of the voting intentions in this segment of voters, against 33% for Jair Bolsonaro (PL).

The president’s speech against high interest rates, inflation targets and BC autonomy tends to worsen the food inflation scenario, as it has pressured the value of the dollar, the reference currency for prices of agricultural commodities, upwards.

Inflation in 12 months of raw materials, goods and services measured by the IGP-M (General Price Index – Market), from Ibre-FGV, fell from 16.9% in January 2022 to 3.8% in the first month of this year —with important declines in wholesale, consumer and civil construction prices.

Among the few exceptions is food, the great “puller” of inflation in recent years. In the last 12 months until January, the increase was 11.3%, higher than the 7.8% in the same period until January 2022.

In the second half of 2022, the dissipation of shocks in production chains caused by the pandemic and in energy prices (due to the war in Ukraine), in addition to the BC’s high interest rate policy, led the IGP-M to converge to official inflation (IPCA ) measured by the IBGE.

This is good news, as it suggests that there will not be major additional pressures on the IPCA for the rest of the year.

Even so, the BC’s Focus survey has, for eight weeks, raised inflation expectations for 2023. It reached 5.78% this week, practically equal to the 5.79% of the IPCA in 2022. BC for this year is 3.25%, with tolerance up to 4.75%.

The main obstacle to the biggest drop in prices is food. “In inflation, food weighs more than anything else. They range from around 15% in families with income up to 40 minimum wages [R$ 52.080] up to 30% on those up to two [R$ 2.604]”, says André Braz, coordinator of the Consumer Price Index (IPC) of Ibre-FGV.

Braz claims that the scenario of a slowdown and interest rate hikes in several economies (especially the US and Europe) will lead to a reduction in the prices of some agricultural commodities, which may favor Brazil. On the other hand, the more expensive dollar internally would have the opposite effect, since the currency is a reference for these prices.

A week ago, the dollar dropped below R$5, the lowest rate since last June. But it returned to the BRL 5.20 range after repeated criticisms by Lula about the conduct of monetary policy by the Central Bank.

Braz claims that the drop already seen in the IGP-M and the high interest rates practiced by the Central Bank could alleviate, within a few months, inflation in general.

“The problem is that the economy will also end up depressed in the future”, he says. In his opinion, the Central Bank’s communication regarding inflation, when there are inevitable and transitory shocks such as those that occurred in the pandemic and with the war in Ukraine, should be more transparent, to avoid such high interest rates.

For Guilherme Moreira, coordinator of the IPC at Fipe (USP’s Economic Research Institute Foundation), “the dollar exchange rate will continue to be a factor of uncertainty” for foodstuffs. The dollar ‘has a desire’ to fall and it would be important to bring it to a lower level.”

Fipe projects food inflation of 8.3% for 2023, adding to the 46.5% increase in the 2020-2022 period. “The ‘thermal sensation’ of the poorest with food inflation is the worst possible”, says Moreira. He predicts that the fall in other items (services and durable goods, such as appliances, for example) will hold the general index — while food will continue to press.

According to Maria Andréia Lameiras, a researcher at Ipea (Institute of Applied Economic Research), there is no record of working classes that have had wage readjustments of 50% in the last three years. “Therefore, even if food inflation slows down, it continues to rise, with effects on income, especially for the poorest.”

Lameiras agrees that there could be some relief if the dollar devalues ​​against the real, but recalls that, in 2023, many Brazilian municipalities have already started to increase urban transport tariffs, frozen in the pandemic years —which should also impact the budget of the most poor.

It is also likely that the government will promote the re-encumbrance of taxes on gasoline starting in March. According to Ibre-FGV projections, instead of an inflation of 0.4% in March, the index could reach 1.2%.

For José Francisco Lima Gonçalves, Fator’s chief economist, although Lula’s rhetoric does not help to control food prices (by putting pressure on the dollar), the president would be using the speech against the BC to justify, in advance, the low growth planned for this year and the impact of inflation on the poorest.

“In several countries around the world, the dollar has fallen more than in Brazil, where the battle against inflation is far from being won. In this sense, Lula’s speech does not help”, says Gonçalves.

Another way of analyzing the behavior of prices is to look at the so-called core inflation calculated by the Central Bank, which remove volatile prices or other non-recurring interference from the account. Several cores have rates above average inflation, which shows the resilience of inflation.

Another indication is the so-called inflation diffusion index, which measures the number of products and services that rose in the month in relation to the total number of items surveyed by the IBGE.

In quarterly moving averages calculated since August 2022, the index has been holding at 65% – which means that, among every 10 items, 6.5 are rising. Until the pandemic, the index found averages of 40% to 45%.

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