Brazil completes six months with inflation above 10%

Brazil is for a semester with inflation accumulated over 10%, according to data released this Friday (11) by the IBGE (Brazilian Institute of Geography and Statistics).

In February, the IPCA (Extended National Consumer Price Index) reached 10.54% in the 12-month period.

Since September 2021, that is, six months ago, the indicator has registered double-digit inflation on this basis of comparison.

The last sequence of IPCA above 10% or longer occurred between 2002 and 2003. At the time, inflation accumulated in 12 months remained in double digits during 13 releases, from November 2002 to November 2003, under the effect of pressure from the exchange rate amid political turmoil​.

In the view of economists, the current rate of 10.54% largely mirrors the effects of the pandemic on prices. During the health crisis, global production chains were disrupted, causing a mismatch between supply and demand.

At the same time, oil and agricultural commodities rose. With the dollar rising in Brazil amid episodes of political tension, the result was the impact on the final prices of products such as fuel and food.

Inflation was also pressured in the last 12 months by factors such as the water crisis, which made electricity bills more expensive.

To complicate the situation, the economic effects of the war between Ukraine and Russia should make it difficult to combat the general increase in prices from March onwards.

The conflict caused a new surge in commodities such as oil, and the consequences are beginning to reach the pockets of Brazilians.

Due to the increase in prices on the international market, Petrobras announced on Thursday (10) a mega-increase in gasoline, diesel oil and cooking gas at refineries.

The readjustment went into effect this Friday, and the fear of analysts is that the rise in fuel prices will spread to different sectors of the economy. Thus, the deceleration of the IPCA to below 10% in the 12-month period tends to be more complicated.

“With the pandemic, there was a breakdown in global production chains, and the rearrangement was slow before the war. The conflict should delay this process even more, in addition to impacting commodity prices”, evaluates economist Fábio Romão, from LCA Consultores.

“That’s why the market is reviewing its projections for the IPCA”, he adds.

LCA Consultores raised its projection for 2022 inflation from 6% to 6.5%. New advances are not ruled out, according to Romão. There are already financial institutions projecting IPCA above 7% until December.

“Data up to February still do not show the effects of high commodities with the war. So, the picture for 2022 is of high inflation not only here in the country, but in global terms”, says the chief economist at C6 Bank, Felipe Sale.

With geopolitical tension, the bank revised its estimate for the IPCA for 2022 from 5.5% to 6%, with an upward bias. Salles says that the war brings a series of uncertainties to the macroeconomic scenario, but he understands that Brazilian inflation may lose strength from the middle of the year, with a truce in energy tariffs.

Due to the drought that hit the country last year, the water scarcity flag came into effect in September, raising electricity bills. The expectation of analysts is that there will be a change of flag from May, due to the improvement in the situation of the reservoirs.

This, says Salles, could generate some relief for consumers, helping to slow the IPCA to below 10%.

Romao goes in the same vein. In addition to a possible change in electricity bills, the effect of higher interest rates could bring the IPCA back to single digits.

“Even so, we will continue with an unwanted level of inflation”, he ponders.

According to economists, any changes in forecasts for this year’s IPCA will largely depend on the duration of the conflict in Ukraine, which is still uncertain.

As reported by the sheetthe mega-increase in fuel prices could set off a vicious cycle of more inflation, interest and public debt in the Brazilian economy.

Persistent inflation may require the Central Bank’s Copom (Monetary Policy Committee) to reinforce interest rate hikes throughout 2022 — and keep the base rate high for longer next year.

In an attempt to contain the advance of prices, the collegiate took the Selic to 10.75% per year at the most recent meeting, in February.

The next Copom meeting is scheduled for March 15th and 16th. The LCA raised the forecast for the Selic in 2022 from 12.25% to 13%. C6 Bank, in turn, forecasts 12.75%.

There are already institutions seeing a rate above 13% until December.