‘Imported inflation’ is highlighted for the first time in high prices in Brazil; understand

In an open letter to justify the rise in prices in 2021, the Central Bank published the traditional decomposition of the IPCA (Broad Consumer Price Index), which ended the year in double digits.

For the first time, the so-called imported inflation, which encompasses a rise in global prices —especially in commodities— and exchange rate variation, played a leading role in the Brazilian indicator.

In the year, inflation accumulated a high of 10.06%, 6.31 percentage points above the center of the target defined by the CMN (National Monetary Council), of 3.75% with a tolerance of 1.5 percentage points up or down .

According to the letter released on Tuesday (11), imported inflation contributed 69% to the deviation from the target in the period, equivalent to 4.38 percentage points.

The document, signed by BC president Roberto Campos Neto, shows that within the component, the price of oil in the international market was the one that most pressured inflation, with 2.95 percentage points, in addition to 0.71 point for commodities in general. and 0.44 point from the devaluation of the real.

According to economists consulted by the leaf, imported inflation gained prominence last year because there was a reversal of a typical movement in the country.

Historically, Brazil benefits from high commodity cycles as it is an exporter of inputs, so the local currency appreciates in these periods.

In this context, the tendency is that the exchange rate and the increase in prices of these products are inversely proportional within the indicator and equalize the item, which is usually well behaved.

This time, however, the prices of these products rose at the same time that the real depreciated, which pushed the values ​​up even further in local currency. In the letter, Campos Neto spoke about the reversal of this movement.

“Although the contribution of the exchange rate to inflation has been lower than in 2020, it is worth noting the break in the historical pattern of appreciation of the national currency during cycles of rising commodity prices, as occurred in the last 18 months,” he said.

“As a result, the growth of the IC-Br [índice de commodities] and the price of oil measured in local currency was amplified, reaching 50.3% and 82.9% in the year, respectively, when comparing the average of the last quarter of 2021 with the same period of 2020, both the biggest changes since the beginning of its historical series”, continued the text.

The dollar reached, in December last year, an average 9.83% higher than that observed in the same period of 2020. In the period, the American currency was around R$ 5.60.

The BC president attributed the exchange rate depreciation to the increase in fiscal risk, when economic agents understand that there may be maladjustment in public accounts, caused especially after maneuvering to make room in the spending ceiling, a mechanism that limits government spending.

In practice, the country failed to benefit from the rise in commodities because political and fiscal noise drove capital away from foreign investors, which devalued the real.

“We didn’t have the benefit in the exchange rate with the high cycle of commodities due to the fiscal and political risk, we were only left with the cost”, said the partner at Panamby Capital and former director of Monetary Policy at the BC, Reinaldo Le Grazie.

When it was incorporated into the monetary authority’s model in 2017, imported inflation was negative (deflation) and helped to explain why the index was below the minimum defined by the CMN that year (2.95%).

Before, the BC measured only the exchange rate pass through in the indicator decomposition. Le Grazie was at the head of the board at the time.

“Imported inflation has an effect similar to the exchange rate pass-through, but we wanted to pay more attention to the price of inputs. [2015 e 2016]”, said the economist.

The idea is to measure how much inflation was imported from other countries. For Le Grazie, however, concepts can change over time.

“Prices rose all over the world, so we imported inflation in 2021. But who exported? It’s a global rise. It’s important to see how each country reacted to it,” said the executive.

André Braz, coordinator of FGV Ibre’s price indices, pointed out that oil was impacted last year both with the rise in prices on the international market and with the exchange rate variation.

“Our currency was greatly devalued with uncertainties about fiscal policy. Even raising interest rates, we did not attract investments,” said Braz.

“The exchange rate influences inflation in two ways. Firstly, imports, since we have to pay more in reais. In addition, we export more because it is more advantageous to receive in foreign currency, which makes the product more expensive here because the supply decreases,” he said. .

Until last year, imported inflation had not been so expressive. In 2018, for example, the component was the only one that pushed prices up in Brazil, but as inflation closed below the center of the target (but within the tolerance range), the highlight was what pulled the indicator down .

When the IPCA decomposition came only with measured exchange rate pass-through, the component was preponderant in the target burst only in 2002, when it had a participation of 5.8 percentage points in the index deviation, which closed at 12.5% ​​- the devaluation of the real had a weight of 43.8% in prices.

“In 2021, we had a series of political noises, such as the ministerial reform, with the central role, and the fiscal issue gained relevance with the issue of precatories, which became the end of the spending ceiling”, said the Bank’s chief economist. Fator, José Francisco de Lima Gonçalves.

For the analyst, the cooling of global inflation should be slow and may continue to put pressure on prices in Brazil. In addition, Gonçalves expects the dollar to continue rising this year due to the electoral process.

In Le Grazie’s view, 2022 should be challenging for emerging capital inflows. “The United States will raise interest rates, which should strengthen the dollar. It must be a very tough year for the whole world,” he said.