Opinion – Vinicius Torres Freire: High inflation gives the center more money and no end date

Inflation is expected to stay close to 10% a year through April 2022, judging by estimates updates. This Wednesday, it was learned that the IPCA reached 10.67% per year. It is the second worst inflationary spurt of this century, smaller only than that of 2002-03. It is also the second worst food shortage.

This inflation will cause even more hunger. With unemployment so high, a lot of wages from the formal private sector will be eaten up, as there will be no readjustments. There will be other effects.

Inflation will reduce the salary of civil servants, which is now frozen or nearly so. Spending on active federal civil servants is falling at a rate of 5% a year; with the military, it is stable. Bidu

This huge inflation could provide more money for parliamentary amendments, as Jair Bolsonaro, Paulo Guedes and their governors of the centrão are messing with the adjustment rule (“monetary correction”) of the spending ceiling. With inflation even higher than expected, more money “remains” for amendments to the Budget (until now, it was in practice lacking, even with the default of the precatories and the ceiling hack).

Inflation estimates are even more flawed. In early 2021, the IPCA was expected to reach 6% or 7% by mid-year, dropping shortly afterwards (this journalist also believed in that). The error is so big that we could imagine that, now, the mistake could change its sign, that inflation could fall. Difficult.

A large part of this inflation is imported, it is a global shock. It’s a lack of product, parts, raw material, because of the disorders that the epidemic caused in production. It is more expensive international freight transport. It is an energy price shock, due to the lack of gas and oil.

In some rich countries, such as the United States, inflation is also the result of a rapid economic recovery coupled with the return of repressed consumption in the epidemic and the shortage of workers (unemployment is low, many people have not returned or will not return to the market). The US IPCA is rising at an annual rate of 6.2%, the highest in more than 30 years.

Much of the Brazilian inflation was caused by the large and persistent devaluation of the real, which has two major domestic reasons: 1) an even greater increase in the public debt in the epidemic; 2) General misgovernance by Jair Bolsonaro, now with the total complicity of Congress dominated once and for all by the center.

A faster fall in inflation would depend on the appreciation of the real (the fall in the “dollar price”). The hypothesis is not in sight. In fact, the real could fall even further, depending on the salty pepper of the electoral campaign and the ruin promoted by Bolsonaro-Guedes.

Inflation could be lower if there were a considerable drop in the price of commodities (oil, iron, grains). Perhaps the case is one of stability — at least inflation would stop rising for that reason.

The price of electricity will stay high until April, May, if everything works out (if it rains, etc.). Again, if at least there are no extra increases, the inflation rate would then stop increasing for that reason.

Inflation will be lower the higher the interest rates, which in the market place are already high enough to crush productive investment in 2022. In an economy with high unemployment, ungoverned and with growing public debt and high inflation, this monetary stick , this rise in interest rates will have to be large. So, “it’s only going to be good if it’s bad”: lower inflation will depend on more tightening and perhaps recession.

If the global supply crisis subsides, if the price of commodities stops rising, if it rains in Brazil and there is electricity and good harvests, it is possible that inflation will drop by around 10% a year from April onwards. Even so, the forecast of more reputable people is that it will remain close to 5% by the end of 2022 (that is, at the ceiling of the inflation target). This with almost zero economic growth. It’s a disaster.