IGP-M deflation: can the lease contract be readjusted downwards?

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Indicator, which is considered rent inflation, fell by 1.93% in June and accumulates low of 6.86% in 12 months. Rent inflation retreated in June PhotoMIX Company The General Market Price Index (IGP-M), which is popularly known as “rent inflation”, recorded its third consecutive deflation in June, with a 1.93% drop, according to the Brazilian Institute of Economics of the Getulio Vargas Foundation (FGV-Ibre). With this result, the indicator started to register a deflation of 6.86% in the accumulated in 12 months, while the low is 4.46% in 2023, until now. However, despite the way the IGP-M is known, this significant drop should not reduce rental prices across the country. This is because most of the contracts no longer rely on this indicator as a reference for price adjustments, but on the Extended Consumer Price Index (IPCA). See more details below. Can the lease be adjusted downwards? Even with the third consecutive fall of the IGP-M, the reading is that there are few effects at the end. The reason is that, in addition to the fact that most contracts are no longer indexed to the IGP-M but to the IPCA (the country’s official inflation) — one of the legacies of the pandemic — other factors also serve as a condition for an eventual reduction in prices. rental prices. As shown by the g1 in April, for the tenant to be able to ask for discounts based on the drop in the IGP-M, the following clauses must be expressly provided for in the contract: that the IGP-M be the only expected readjustment index, without possibility of alteration; that the variations are both positive and negative; that the owner cannot ask for the property back, unless the Tenant fails to comply with this Agreement or the Law. ⚠️ Banco Original’s chief economist, Marco Caruso, also recalls that even contracts indexed to the IGP-M may also take time to feel the practical effects, depending on the maturity. Can contracts indexed to the IPCA fall? For IPCA-indexed contracts — which became the majority after the pandemic —, however, the impacts should only begin to appear when the IGP-M deflation is reflected in consumer inflation. The exchange of the IGP-M for the IPCA as an index for rental contracts was part of the negotiations between landlords and tenants. The change was advised by specialists, as the IPCA better reflects the cost of living of the population — both for the owner, who will have his rent adjusted accordingly, and for the tenant, who will have an increase more corresponding to the other prices. “Historically, the pass-through of the fall in the IGP-M to the IPCA […] they usually happen in up to three months”, said Caruso. The expectation of market specialists is that the official inflation of the country presents a firmer deceleration in this middle of the year. “We see a favorable window of inflation for a while. In our calculations, the best moment for the 12-month IPCA is between June and July, but from that point on, it becomes another situation”, commented the expert, noting that the trend is for the indicator to accelerate in the second half. The deflation observed in the IGP-M in June was, once again, driven by the Producer Price Index (IPA, which has a weight of 60% in the General Index), which fell 2.73% in the month, renewing its historical low. This result was driven, above all, by the sharp drop in the subgroup of fuels for consumption, which plummeted 10.56% in the month, after falling 1.27% in May. of fuel prices at the refinery. The price of Diesel shrank by 13.82%, while the price of gasoline fell by 11.69%. Aside from this contribution, the prices of important agricultural commodities continue to fall, such as: corn (-14.85%) and cattle (-6.55%)”, comments André Braz, Coordinator of Price Indices at FGV-Ibre. Consumer Price Index (IPC, which has a 30% weight in the IGP-M) also retreated in June (-0.25%), after reporting an increase in May. expenses that make up the index, but the highlights were the Transport and Food groups. The National Construction Cost Index (INCC, weight of 10%), on the other hand, rose 0.85%, representing an acceleration in relation to May, when the index had risen by 0.40%. Previous. Understand how inflation is calculated

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