Election makes fighting inflation difficult, economists say

A combination of threats is gaining strength and should make it difficult to fight inflation in Brazil this election year, according to economists.

The risks have different origins: they involve from the rise in oil prices on the international market, which impacts fuels in the country, even the damage caused by the drought in food production in states in the South and Center-West regions.

There is also the fear of repercussions on the exchange rate — and inflation — that could be caused by political uncertainties and noise in the fiscal area.

Given this context, analysts are beginning to see the possibility that the IPCA (Broad Consumer Price Index) will be even further away from the goal pursued by the BC (Central Bank) in 2022.

This year, the ceiling for the inflation target is 5%. The financial market, however, already expects a higher IPCA.

The median of projections for the indicator rose from 5.09% to 5.15%, according to the most recent edition of the weekly Focus report, released on Monday (24) by the BC.

“This is not a purely demand-driven inflation. There is great cost pressure on important prices, such as energy and food,” says Nicola Tingas, chief economist at Acrefi (National Association of Credit, Financing and Investment Institutions) .

Camila Abdelmalack, chief economist at Veedha Investimentos, has a similar opinion. “We begin to envision an IPCA closer to 6%”, he says.

For now, she projects inflation of 5.5% in 2022, but mentions that the bias is high in this estimate.

most expensive fuel

The advance of oil in the international market causes inflationary pressure in Brazil because it is taken into account by Petrobras when setting fuel prices at refineries.

Last week, the commodity reached the highest level since 2014. Analysts associate the escalation of oil to geopolitical tensions in producing regions and the decision of the main supplier countries not to increase supply, despite growing demand.

Pressured by the scarcity of items such as gasoline and electricity, the Jair Bolsonaro government (PL) is studying a PEC (proposed amendment to the Constitution) to authorize the temporary reduction of taxes on fuels and electricity, in an attempt to alleviate the pockets of consumers in the country. election year.

The proposal worries some analysts due to the possible impact on public accounts. If PIS/Cofins rates on gasoline, diesel and ethanol were zeroed, the impact on revenue would be in the range of BRL 50 billion per year, according to government sources informed to leaf.

In the view of analysts, even with the eventual relief in prices for consumers, the loss of income would also cause a kind of collateral effect on inflation.

public accounts at risk

It’s just that a new fiscal noise tends to have a negative impact on the financial market and can put even more pressure on the dollar, generating reflexes on goods and services that depend on imported inputs, for example.

“The project is like giving with one hand and taking away with the other. The market reading is one of more fiscal uncertainties. This can raise risks and further devalue the real against the dollar”, reports Camila Abdelmalack, from Veedha Investimentos.

As reported by the leaf, the fear that there will be a spike in inflation in the third quarter of 2022, at the height of the electoral campaign, triggered Bolsonaro’s decision to sponsor the PEC to cut taxes on fuel.

“The outlook for inflation remains worrying,” says Alex Agostini, chief economist at the Austin Rating agency.

“The fiscal party potentiates risks and, consequently, inflation. In addition, there are also issues such as rising oil prices and drought in the South”, he adds.

I’m 2021, o IPCA rose 10.06%, the highest since 2015, when the Brazilian economy was going through a recession under Dilma Rousseff (PT).

As a result, the official inflation indicator easily exceeded the target pursued by the BC last year, whose ceiling was 5.25%.

In 2022, the market expectation is for a deceleration of the IPCA. That is, the index tends to show a smaller increase than in 2021, but should remain at an uncomfortable level, above the target.

drought threatens food

At the start of 2022, the drought that punishes crops of the states of the South region and Mato Grosso do Sul also worries economists due to the possible reflexes on the supply of agricultural products and their respective prices.

The crop failure, according to analysts, can put pressure on items such as corn, soybeans and fruits. Pastures have also been damaged by the shortage of rain, affecting milk and meat production.

“Food should not have such a rapid deceleration”, analyzes Nicola Tingas, from Acrefi.

To try to curb inflation, the BC has been raising the basic interest rate. The Selic is at 9.25% per year and should end 2022 at 11.75%, according to the median of the Focus bulletin.

BC President Roberto Campos Neto assessed this month that inflation in Brazil is impacted by high oil prices and climate issues.

According to him, these factors have already caused a small increase in market expectations for the IPCA. However, Campos Neto signaled that the inflation accumulated in 12 months may have reached its peak, initiating a slow movement.

“It will be another difficult year in terms of inflation, even though the expectation is for a smaller advance than in 2021”, says economist Ana Cláudia Além, professor at Ibmec-RJ.

“The pressure of commodities such as oil continues, and the dollar is still expensive in Brazil. The exchange rate is impacted by uncertainties, which are usually not lacking in election years. And there is still a crop failure”, he adds.

Alexandre Manoel, chief economist at AZ Quest, projects inflation of 5.4% at the end of the year, but does not rule out a higher accumulated.

“There are risks up and down, but the greater probability today is up”, he says.

In the analyst’s view, the main threats to price control come from abroad at the moment, with cost pressure generated by commodities such as oil.

“Our bet is that, in this first quarter, we will have an inflation still around 10%”, he estimates.