Market already sees 8% inflation and longer cycle of interest rate hikes

Impacted by fuel and food, the highest inflation for March in 28 years made the financial market raise projections for the IPCA (National Index of Broad Consumer Prices) in 2022.

The rise in prices also puts more pressure on the BC (Central Bank), which tends to extend the cycle of hikes in the basic interest rate, the Selic, to try to stop the high price, according to analysts.

In March, the IPCA registered inflation of 1.62%, informed this Friday (8) the IBGE (Brazilian Institute of Geography and Statistics).

This is the highest rise for the month since 1994 (42.75%), before the implementation of the real.

The result came well above the median of market projections. The expectation was for inflation of 1.35%, according to the Bloomberg agency.

In the 12-month period, the IPCA reached 11.30% until March. It is the highest level since October 2003 (13.98%) on this basis of comparison.

The market even expects the accumulated to lose steam and return to single digits until December, in a context of higher interest rates, a truce in electricity bills from the second half of April and some improvement in the supply of inputs.

However, this slowdown faces a number of risks ahead and could be slower than initially expected. It is not by chance that the projections for the IPCA are being revised upwards.

LCA Consultores, for example, raised its inflation estimate this Friday from 7.5% to 8% at the end of 2022.

“We understand that this March IPCA result showed quite widespread pressures”, indicated the house in a report.

Santander Asset should increase its estimate from 7% to close to 7.5%.

In a report, Eduardo Jarra, chief economist at Santander Asset, assesses that the March data indicate “more caution regarding the disinflation process in the coming months, potentially slower and uncertain than previously expected”.

The strong increase of 1.62% was driven by the cost of fuel, especially gasoline, and food. However, analysts see pressures more spread across sectors of the economy.

A sign of this is that the so-called diffusion index was above 70% for the fourth consecutive month, according to the IBGE.

The indicator measures the percentage of goods and services with high prices in the month, in a sample with 377 components.

In March, diffusion rose to 76.13%. It is the most intense level since February 2016 (77.21%). In practice, the higher index signals that inflation is more widespread throughout the economy.

“There is a very worrying spread of inflation. The question remains whether interest at 12.75% per year will be enough to control the scenario. I don’t think so. We should have an additional high”, says Sergio Vale, chief economist at MB Associates consultancy.

The Selic is at 11.75% per year. Based on signals given by the BC, part of the market expected the interest rate to rise by one percentage point in May, to 12.75%, ending the cycle of highs. But with persistent inflation, the tightening could continue into June.

For now, MB Associados projects a Selic rate of 13% at the end of 2022, but does not rule out a higher rate, up to 13.5%, according to Vale.

In relation to the IPCA, the consultancy maintained the forecast of a rise of 7.8% in the year. However, inflation above 8% until December is not ruled out, says the economist.

“There is a great risk of inflation closing above 8%”, highlights Vale.

The higher Selic is a BC weapon to try to curb demand for products and services, in an attempt to mitigate prices.

It can also attract more foreign resources to the country, reducing the dollar exchange rate and, consequently, inflation. Analysts, however, call attention to the risks that remain in the scenario.

Fuels and gasoline pull up in March

In March, eight of the nine groups of products and services surveyed by the IBGE had price increases. The biggest change (3.02%) and the main impact (0.65 percentage point) were from transport.

Then came the food and beverage group. The segment rose 2.42% and accounted for 0.51 percentage point of impact. Together, the two groups contributed around 72% of the IPCA.

The transport result was influenced by the increase in fuel prices (6.70%). The highlight came from gasoline, which advanced 6.95%. Thus, it was the sub-item with the highest individual weight (0.44 percentage points) in the monthly index.

The fuel price reflects the mega-increase in fuels promoted by Petrobras on March 11. The state-owned company readjusted the prices of gasoline, diesel oil and cooking gas due to the surge in oil on the international market. The commodity rose at the time with the consequences of the war between Russia and Ukraine.

Food, according to the IBGE, became more expensive due to issues such as adverse weather at the start of the year in Brazil.

There were heavy rains in the Southeast and drought in the South, which affected production and prices. The pressure of diesel on freight costs is pointed out as another possible explanation for the food price.

This Friday, Necton Investimentos also revised its forecast for the IPCA for 2022. The expected increase went from 6.77% to 7.4%.

IPCA ‘complicates’ Copom, says analyst

According to André Perfeito, chief economist at Necton Investimentos, the March inflation data reinforce the prospect of a longer monetary tightening. The Selic should rise to 12.75% in May and, subsequently, reach at least 13.25%, said Perfect.

In the view of José Francisco de Lima Gonçalves, chief economist at Banco Fator, the March IPCA “complicates” the Copom (BC Monetary Policy Committee).

“The Copom is more pressured to prolong the Selic high cycle. Our scenario already included the Selic at 13.25% by the end of the year”, pointed out a report signed by the economist.

Ativa Investimentos, on the other hand, increased its forecast for this year’s IPCA from 6.85% to 7.06%. The house also revised its inflation expectations for next year (from 3.8% to 4.1%) and for 2024 (from 3.1% to 3.2%).

Itaú Unibanco revised its forecast for the IPCA 2022 from 6.5% to 7.5%, reflecting the greater pass-through of recent fuel readjustments, their secondary effects and a more prolonged inflation of industrial goods.

“Incorporating greater inertia and persistence of the inflationary process, we revised our forecast for next year from 3.5% to 3.7%,” the bank said in a report. The institution expects the Copom to continue raising the Selic rate up to 13.75% per year.

The IPCA has been in double digits in the 12-month period since September last year. Thus, it is far from the inflation target pursued by the BC.

This year, the center of the benchmark measure is 3.50%. The ceiling is 5%. If the estimates are confirmed, 2022 will be the second consecutive year of non-compliance with the target.

When this happens, the BC president has to write a letter explaining the IPCA’s advance above the reference interval.

On Thursday (7), the president of the monetary authority, Roberto Campos Neto, assessed that the calibration of monetary policy in Brazil will depend on the extent of the shocks on inflation.