The IBGE (Brazilian Institute of Geography and Statistics) released this Wednesday (10) the IPCA, official inflation index, for October, and again there was an upward surprise (1.25%, above the 1.06% consensus). Inflation accumulated in 12 months increased by 10.67%, the highest value since January 2016.
There was an acceleration in almost all items, and the only one that was even more controlled, services inflation, rose 0.84% ​​with the gradual opening of this sector. Administered prices, on the other hand, continue to be the main villain, rising 1.35% in the month and accumulating 17% in 12 months, due to recent increases in energy and gasoline.
The market consensus for year 2021 inflation is expected to approach double digits in the coming weeks, and the outlook for inflation in the near term is still quite worrying.
There is a wave of inflation sweeping the world as a by-product of the pandemic. There was a rotation of demand for services for industrial products, which put pressure on production chains around the world. The normalization of these chains will still take some time, which is aggravating inflationary pressures. Also on Wednesday, the inflation rate for October in the United States was released, and that country has the highest accumulated inflation (6.2%) in 30 years.
Brazil is suffering more due to the devaluation of the real, which is higher than in similar countries due to concerns about the fiscal regime. The anticipation of the electoral discussion and the government’s weakness in Congress are affecting the credibility of fiscal policy, with the main fiscal rule, the spending ceiling, being undermined.
The rise in commodities, associated with the weakening of the national currency, reached 100% in reais from May last year to October 2021, putting pressure on the price of food and industrial products. Generally, when commodity prices rise, the national currency strengthens, but political and fiscal problems have been weakening the currency since last year.
To make matters worse, we have the price of oil abroad that continues to rise and the readjustments of electricity due to the increased use of thermoelectric plants.
One factor that could be positive for inflation in the coming months is the deceleration in food prices at home. The leading indicator of these prices, which is the agricultural wholesale price index, came in slightly negative in September and October. In relation to industrial and administered prices, there is still no downward trend ahead, as there is a tendency for these prices to remain high worldwide.
The Central Bank should continue to raise the basic interest rate (Selic) to try to contain the contamination of inflation for the coming years. For the time being, inflation for 2022 is expected to fall to around 4.5%, which, if verified, could be a major achievement by the monetary authority. It is likely that the BC will continue to raise interest rates until at least the middle of next year, and it is plausible that the Selic will approach 12% in the 2nd quarter of 2022.
The contractionary monetary policy is one of the main reasons for the market to be cutting growth projections for next year. But if monetary policy is not tightened, inflation could spread, and Brazil could lose monetary stability, which was won with great difficulty 27 years ago. That would be a double nightmare, as at this point there is already concern about fiscal stability with the attacks on spending ceilings.
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