Gasoline, wholesale prices and other possible improvements in inflation – 05/11/2023 – Vinicius Torres Freire

There are indications that inflation should fall again or give some relevant refreshment at least for expectations. Producer price deflation increases. The dollar has been on a downward trend since the end of March. There are rumors of a reduction in the price of gasoline (although the Lula government itself, according to people from the Planalto, still doesn’t believe that yet).

The biggest doubt is the pace of wage increases and, as a result, service inflation. On the side of expectations, it depends on when and how Lula’s mobile spending ceiling (fiscal framework) will be approved and what will be done with the inflation target.

The framework should come out of Congress a little tighter, but not enough to significantly modify market prices, interest and exchange rates, and expectations. But approval is worth something. In order to take advantage of and reinforce a small favorable wave in prices, it would still be convenient for the government to bury the discussion of changing the inflation target, at least this year or while the environment is tense in relation to prices and the future of monetary policy.

The IGP-DI, FGV’s inflation indicator, is increasingly in the red. It is the General Price Index – Domestic Availability, mostly 70%, a producer price index or close to it (wholesale and civil construction). In the 12 months through April, the IGP-DI deflation was 2.57%. In March, 1.16%. In February, the IGP-DI still increased, 1.53%. In April 2022, the increase was 13.53% in 12 months.

This is not to say that improvements in wholesale rates are simply passed on to consumers. But the IGP deflation helps. There was a relevant drop in the prices of grains, corn and soybeans, thanks also to the super harvest of iron ore and diesel.

The price of oil is behaving, pointing downwards. Gasoline is down slightly in the relevant market for Brazil. The high dollar contributes. That is why there are also rumors that Petrobras may soon reduce the price of gasoline, as the domestic price at the state refinery would already be above that of the foreign market that interests us.

More or less. Depending on who does the math, the difference would be almost nothing or up to 15%. Planalto people say they “expect” a reduction soon, but they don’t know when. Moreover, he also says that Petrobras’ new pricing policy is not ready. That is, a way to “Brazilianize” the cost of fuel at the refinery, which would be done in a “very responsible way and which will surprise the critics of the change”. Hmm.

There will be no miracle of disinflation, of course. The rise in prices is stubborn, in the case of the services sector it is demand inflation, yes – a fall depends on extra moderation in the average wage increase.

It’s happening, but very slowly. It was expected that the change would be noticeable in April, which seems unlikely, as the pace of growth in economic activity surprised, upwards, even if it is very mediocre.

As for expectations, the improvement depends on the approval of this slightly tightened framework by Congress (more pressure for a primary surplus and less possibilities for increased spending). It depends on the end of the now inconvenient conversation about raising the inflation target (when this goat entered the room, expectations of rising prices and interest rates turned sour). The perspectives of raising revenue seem more realistic (or less unrealistic), given some victories and measures taken by the government. Achieving the government’s primary surplus target becomes less difficult.

As the commonplace says, there is a small window of opportunity to contain inflation. It’s not a big turnaround, but the government can help well.

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