High oil prices threaten achievement of inflation target – 09/19/2023 – Market

Brazilian inflation still has room to close 2023 below the target ceiling. However, fuel prices and their indirect effects on the economy represent the “big point of uncertainty” for the IPCA (Broad National Consumer Price Index).

The assessment is by economist André Braz, from FGV Ibre (Brazilian Institute of Economics of the Getulio Vargas Foundation). Despite the recent rise in oil prices, what could offset the impact of possible increases in fuel prices in Brazil is the fall in food prices, according to the researcher.

The IPCA, released by IBGE (Brazilian Institute of Geography and Statistics), serves as a reference for the inflation target pursued by the BC (Central Bank).

In 2023, the center of the measure is 3.25%. The tolerance is 1.5 percentage points higher (4.75%) or lower (1.75%). In other words, the target will be met if the IPCA stays within this range until December.

Braz participated this Tuesday (19) in the release of new data from the IPGF (Family Expenditure Price Index), an indicator launched this year by FGV Ibre. This Wednesday (20), the Copom (Monetary Policy Committee) announces the basic interest rate — an instrument used to contain inflation.

“There is still room for us to have inflation within the target tolerance range in the IPCA. That is, a number up to 4.75%, even if Petrobras publishes new readjustments”, says Braz. “On the other hand, food has been falling in price. Food is compensating for other sources of pressure.”

On average, projections from financial market analysts point to an IPCA of 4.86% in 2023, according to the most recent edition of the Focus bulletin, released on Monday (18) by the BC. The estimate is above the target ceiling, but decreased compared to the previous report (4.93%).

Braz, however, highlights that the recent rise in oil prices on the international market could force readjustments in products such as gasoline and diesel oil in Brazil.

This Tuesday, gasoline sold at Petrobras hubs showed a 9% lag in relation to international prices, according to Abicom (Brazilian Association of Fuel Importers). The last adjustment announced by the state-owned company occurred in mid-August.

“From now on, there may be new increases. The oil issue has not yet been resolved abroad”, says Braz.

In a statement, Petrobras stated that it does not anticipate its pricing decisions and that any adjustments are made “in the normal course of its business, supported by technical and independent analyses.”

“The company continues, however, to maintain balance with the international and national markets, taking into account its market share, which allows the optimization of its refining assets, operating them in a safe and profitable manner,” said the company.

Food prices, in turn, have been falling in Brazil amid a larger harvest scenario and relief from part of production costs.

Food at home accumulated a drop of 0.62% in the 12-month period up to August, according to the IPCA. As shown by Sheetit was the first time that this segment showed deflation in the 12 months since May 2018.

Braz warns that climate phenomena such as El Niño pose risks to prices in the coming months. The magnitude of the effects, however, is still uncertain, according to the economist.

El Niño is characterized by the abnormal warming of the Pacific Ocean near the Equator, increasing global temperatures. Scientists from the United States declared the beginning of the phenomenon in June.

In Brazil, the event increases the chance of large volumes of rain in the South and increases the risk of drier periods in the Northeast and North, according to Inmet (National Institute of Meteorology).

The IPGF is prepared by FGV Ibre based on a basket of goods and services whose weights are updated monthly based on changes in family consumption patterns.

The idea is to capture the effect that the replacement of items has on prices more quickly than the IPCA.

In August, the IPGF rose 0.03%, below the official IBGE index (0.23%). Over the last 12 months, the increase in the FGV Ibre indicator was 2.78%, also lower than that of the IPCA (4.61%).

The expectation of those responsible for the IPGF is that the accumulated figure will be closer to the center of this year’s inflation target (3.25%), compared to the IBGE indicator.