Analysis: Highest inflation in 20 years expected to remain strong until election

Inflation is the highest in nearly 20 years — 19 years and three months, to be precise. It hit 11.3% a year in March. It is the second biggest since 1999, since the inception of the inflation targeting system, and it is the second longest lasting price surge since then.

It will last longer: it should stay above 10% until at least August. Thus, the basic interest rate must go beyond the 12.75% projected by the Central Bank. It is possible that the IPCA for 2022 will be between 7.5% and 8%.

To be frank, the future of inflation until 2023 depends almost on luck: on the price of the dollar. That is, luck and no more disaster brewing until then, like a crazy election campaign in the economy and politics.

The monetary crunch will make life even more difficult for the next government. People already know that life is even more difficult than usual. The outbreak of food inflation is also the biggest since 2003. Inflation of “food at home” accelerated again, in annual terms, reaching 13.7%. It was already at 21.1% in November 2020. But the price of food goes up from an already very high notch.

The general inflation, the IPCA, accumulated in 12 months until March of this year is second only to the high price of the months between the end of 2002 and mid-2003, caused by a large devaluation of the real, in turn caused by the panic of Lula’s election 1.

The high price now was also caused by a relevant devaluation of the real (the dollar became 30% more expensive between February 2020 and December 2021). Prices also jumped because of a global shock, recently exacerbated by the war in Ukraine, and, to a lesser extent, but relevantly, by mismanagement.

The rise in prices of the Jair Bolsonaro years is also on the podium when it comes to the diffusion of increases (how many products have gone up in price in a given month, as a proportion of the total prices surveyed). In March, the diffusion rate was over 76%. It is second only to the inflation caused by the 2002 election and the shock of the Dilma 2 government (2015-2016), which released previously regulated prices and also faced a strong devaluation of the currency, caused by the political turmoil.

In addition to being diffuse by measuring the relative quantity of products that make them more expensive, inflation also spreads according to other criteria. Annual tradables inflation was 10.4% in March 2021; was 12.5% ​​in March this year. That of non-tradable goods was from 2.7% to 8.2% in this period.

“Non-tradable goods” are those that, in general or for a long time, are not traded on the foreign market (exported or imported): in general services, some food, for example. The “tradables” are generally those whose prices are determined directly on the world market, roughly speaking (fuels, grains, ores, meats, industrial products, etc.).

The prices of “non-tradables” are often pressured when there are rapid increases in wages. It’s not the case at the moment.

The fuel shock contaminates other prices. There is more inflation with the resumption of activity in the service sector, largely inactive at the worst moment of the epidemic. It may also be that there is already some “inertia” (almost automatic readjustment due to past inflation or also due to expectations of lasting inflation).

Service sector inflation was 1.7% per year in March 2021; in March 2022, of 6.3%. In this period, the IPCA changed from 6.1% to 11.3%, always in the measure accumulated in 12 months.

The industry, moreover, has increased costs because of the scarcity of a lot of input, still due to reduced supply or high demand, after the worst of the epidemic, in addition to transport problems. The problem won’t go away anytime soon.

The reduction in the price of electricity, as of mid-April, should contain some of the rise in the IPCA (which should continue). If the real appreciates or stays at its current price, there should be some help as well (ie “everything else constant”).

However, even with the appreciation of the Brazilian currency in 2022 and some moderation in the price of oil, the price of a barrel in reais is still about 16% higher than at the beginning of the year. There’s fat to burn there.

An electoral campaign with a lot of economic nonsense or tumultuous by Bolsonaro can make the dollar more expensive. What is most certain is that the high price will continue to reduce the real value of the salary until well into 2023.