Inflation does not end in 2021 and also threatens prices in 2022

The reflexes of the escalation of inflation in Brazil go beyond the wave of upward revisions in the IPCA (Extended National Consumer Price Index) of 2021.

Products and services should remain under pressure in the short term, amid a context of high dollar, fiscal uncertainties and recovery in the services sector.

The picture brings the risk of inflation spreading even further across the economy, at least until the start of 2022, compromising the performance of economic activity, analysts point out.

The concern gained strength this Wednesday (10), after the release of the October IPCA. Last month, the official inflation indicator rose 1.25%, above market projections.

The rate is the highest for October since 2002, informed the IBGE (Brazilian Institute of Geography and Statistics).

As a result, inflation accumulated in 12 months remains above double digits, reaching 10.67%.

This is the highest accumulated since January 2016 (10.71%), when the Brazilian economy was in recession.

“We are heading towards double-digit inflation at the end of 2021. This poses many difficulties for 2022”, says Sergio Vale, chief economist at the MB Associados consultancy.

“The exchange rate remains under pressure, we have a scenario of many fiscal challenges, and the government is not signaling a course correction. The problem with inflation at this level is that it can spread even further.”

The advance of the IPCA in October was accompanied by increases in the prices of the nine groups of products and services surveyed by the IBGE.

The highlight came from transport. This segment had the biggest change (2.62%) and the main impact on the month’s index (0.55 percentage points).

Within transport, gasoline advanced 3.10%. Thus, it had the main individual contribution (0.19 percentage points) in the October IPCA.

In November, gasoline should again put pressure on the IPCA, says economist André Braz, a researcher at the FGV Ibre (Brazilian Institute of Economics at the Getulio Vargas Foundation). This must happen because, at the end of last month, Petrobras announced a new readjustment in the refineries. Diesel oil also rose at the time.

The state-owned price policy takes into account oil prices on the international market, which jumped with the reopening of the global economy, and the variation in the dollar.

The American currency, cites Braz, has been rising in the face of political turmoil in Brazil and fiscal uncertainties.

Doubts about the direction of public accounts have gained strength in recent weeks, after the Jair Bolsonaro government (no party) decided to circumvent the spending ceiling to pay for Auxílio Brasil.

“The big issue is fiscal uncertainty. There is a very large inflationary inertia in the country. We are going to take the effect of some readjustments this year to 2022”, defines Braz.

“For example, urban bus fares should be revised with the higher diesel price”, he completes.

The economist reports that, in addition to fuels, items such as electricity should continue to pressure consumers’ pockets between the end of 2021 and the beginning of 2022.

The water scarcity flag, which makes the electricity bill more expensive, should be in effect until April of next year.

High levels of fuel and electricity increase operating costs for companies, which can be passed on to goods and services sold to consumers.

“Electric energy should only get lower from May onwards”, says Braz.

In October, the second biggest individual impact on the IPCA came from airline tickets: 0.15 percentage points. The item rose 33.86% last month.

“The exchange rate depreciation and the rise in fuel prices, particularly aviation kerosene, have contributed to the increase in airline tickets,” reported Pedro Kislanov, manager of the IPCA survey.

“The improvement in the pandemic scenario, with the advance of vaccination, has led to an increase in the flow of people and passenger traffic at airports. As supply has not yet adjusted to demand, this may also be contributing to the increase prices,” he added.

After the release of the October IPCA, analysts and financial institutions started to forecast double-digit accumulated inflation, at the level of 10%, until the end of 2021.

Vale, from MB Associados, recalls that, due to the scarcity of goods and services, the BC (Central Bank) will have to promote further increases in the basic interest rate, the Selic. Higher interest rates play against household consumption and business investments.

In other words, there is an additional challenge for the growth of economic activity in 2022, an election year. MB projects stagnation (0%) of the GDP (Gross Domestic Product) next year, but does not rule out a recession — a fall in the indicator.

In addition to internal difficulties, there are also risks in the external scenario. This is because prices are also gaining strength in other countries.

Producer inflation in China, for example, reached a 26-year high in October. Coal prices soared amid the energy crisis in the Asian country’s industrial hub.

José Ronaldo Souza Júnior, director of IPEA and professor at Ibmec-RJ, assesses that inflation in Brazil should remain under pressure between the end of 2021 and the beginning of 2022. He reports that the return of the services sector is one more element than impact on the IPCA at this time.

Despite this, the analyst projects a truce in prices over the next year, due to factors such as higher interest rates and better water conditions, which could lower the electricity bill.

In this century, the highest accumulated IPCA in 12 months was registered by the IBGE in May 2003. At the time, the inflation rate reached 17.24%.

“Reaching such a level would be a tragedy that is not yet on the radar. Monetary policy has been applying a remedy [alta dos juros] to contain inflation. The problem is that this remedy also affects economic activity”, analyzes Braz, from FGV Ibre.