Inflation should break the truce and rise again in the 2nd semester; know what will get more expensive and why

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Economists project inflation above 6% for the end of 2023. It would be the third year in a row that the country exceeds the target stipulated by the National Monetary Council (CMN). Inflation should break the truce and rise again in the 2nd half Marcello Casal Jr/Agência Brasil The Extended National Consumer Price Index (IPCA), an indicator considered the country’s official inflation, slowed down again in April. With an increase of 0.61% in the month, the country now has an accumulated inflation of 4.18% in 12 months. The index is currently within the tolerance range of the inflation target stipulated by the National Monetary Council (CMN), of 3.25% in 2023. It is considered met if it ends the year between the 1.75% floor and the ceiling of 4.75%. But inflation projections show that the result should again break through the ceiling of the target over the second half – which could result in the third year in a row of overflow. The expectation of experts heard by the g1 is that, as of July, the accumulated price index in the 12-month window will return to an upward trajectory, reaching more than 6% at the end of the year. A number of factors explain the situation. The first one is the basis of comparison for the accumulated in 12 months. Last year, the months of July, August and September showed deflation due to exemptions for essential items during the electoral race. In this way, the expectation is that, in the disclosures that take place throughout the second half of this year, the reduction of taxes on items that are important for inflation will start to leave the count. This consequently results in an increase in the 12-month inflation rate. The great “villain” of the second half, experts estimate, will be gasoline, which falls into the group of administered prices (understand more below). Also included are increases in items such as medication, food away from home, clothing and even lotteries. Combating inflation is the core mission of the Central Bank of Brazil. Therefore, an acceleration of the index brings more uncertainty about when it will be possible to lower the country’s basic interest rate, the Selic. The higher the prices, the greater the chances that the Monetary Policy Committee (Copom) will keep the basic rate at high levels in its next meetings. The Selic is currently at 13.75% per annum, and has been the target of harsh criticism by the Lula government (PT), which accuses the BC of harming the growth of the Brazilian economy by increasing the cost of credit and discouraging investments. (understand more below) What explains the rise in the second half The rise in the IPCA in the last six months of 2023 should be boosted by the strong influence of so-called administered prices – those that are monitored, depend on some public body or include taxes and fees, such as fuel and water and electricity bills. Economist André Braz, coordinator of the Price Index at the FGV’s Brazilian Institute of Economics, estimates that the first effects of the increase in this set of items will already be seen in July’s inflation, with the strong impact of gasoline. One of the reasons for the increase in fuel prices is the standardization of the Tax on Circulation of Goods and Services (ICMS) among the states, which will come into effect on June 1st. The change establishes a single rate for both gasoline and anhydrous alcohol, which is used in the composition of gasoline sold at service stations. Braz explains that, according to estimates, gasoline prices may increase by more than 10% in some cities in the country. Fuel weighs heavily on official inflation and accounts for almost 5% of the family budget. “This means that, for every 1% increase that gasoline presents, it impacts official inflation by 0.05 percentage points. If it is 10% [de aumento na gasolina]0.5% [do IPCA] in July it may come just because of gasoline”, calculates Braz. The increase in the price of fuel should occur even in the face of the downward bias in the price of a barrel of oil on the international market and the appreciation of the real against the dollar, adds the economist, remembering that the scenario also depends on the price policy practiced by Petrobras. The state-owned company marks the values ​​of sales to distributors based on the import parity price (PPI). Petrobras’ official price policy was created in 2016, guided by fluctuations the price of a barrel of oil on the international market and the exchange rate. IPCA rises 0.61% in April, driven by medicines and above market expectations Tax waivers The tax waivers adopted in 2022, amid the electoral race, caused an atypical reduction in prices throughout the second half of that year. One example is the limitation of ICMS on fuel, electricity bills, communications and transport, approved in June. The results were three consecutive months of deflation: July (-0.68) , August (-0.36) and September (-0.29), which reduced the accumulated inflation in 12 months. Scenario that, however, will be very different this year. “We will not see this again in 2023. Quite the contrary. There is now the recovery of taxes that were cut last year. And this will push inflation up in the second half”, explains Braz, from FGV. In addition to the return of taxes, the distance from the atypical results of 2022 is another factor that will influence the accumulated inflation in the second half of 2023, points out Guilherme Moreira, coordinator of the Consumer Price Index (IPC) of the Institute of Economic Research Foundation, from USP. The economist explains that, with those results coming out of the accounts, there should naturally be an increase in accumulated inflation in the second half. The current index, therefore – around 4% in the 12-month window – tends to be the lowest accumulated for the year. “Why should inflation end the year above 6%? Because, last year, there were factors that artificially held back inflation. Now, there are taxes that come back. Therefore, we take part of the inflation that could have happened last year and is being played for this year”, says Moreira. “And this will happen more intensely in the second half.” Service sector and pandemic reflexes Food away from home is also a prominent item in the rise in inflation. The increase in prices is directly related to the resumption of activities, which intensified in the second half of 2022, but remains strong in 2023, after the peaks of the Covid-19 pandemic. “In addition to eating away from home, the [aumento de preços no próprio setor de] clothing also reflects this return to face-to-face work. Therefore, the services associated with this resumption should continue to reflect on dammed prices”, says Moreira, from Fipe/USP. André Braz, from FGV, reinforces that the services with the greatest weight in the family budget are indexed (that is, they undergo readjustments of according to indices from previous periods), such as residential rent, school fees and health plans. “All of this carries a little of the inflation of the previous year. This is bad, because it creates greater inflationary persistence around services”, he says. “Inflation in services is more than double what we have for this year’s target, which is 3.25%.” The economist explains that the weight of services in the family budget is 30%, while monitored prices “swallow” 25% of income. “So, we have more than half of the family budget committed to things that will not alleviate inflation in 2023. , the Central Bank has postponed the start of interest rate cuts”, concludes Braz. What to expect from food prices with the rise in the inflation rate in the 2nd semester Other readjustments Medicines are also remembered by specialists among the items on the rise A federal government resolution now allows, as of March 31, readjustment of up to 5.6% in drug prices. The amounts can be passed on by pharmacies at once or throughout the year. In addition to the Mega-Sena and Lotofácil, Quina, Lotomania, Timemania and Dia de Sorte increased. The increase, announced by Caixa Econômica Federal in early April, was up to 25% in games, and became effective at the end of the same month. The bank’s justification was precisely the recomposition of values ​​in the face of inflation. “Lotteries commit 1% of the family budget. They are an example of monitored prices and add to the list of things that will make this group of expenses advance this year”, adds Braz. The economist also highlights the rise in airfares, amid the recovery of mobility after the restrictions imposed by Covid-19. “Flights have already increased by more than 40% in 12 months”, he recalls. Expectations for the interest rate The persistence of inflation is one of the main influencing factors for the Central Bank’s decisions to maintain the country’s interest rate. The Selic at 13.75% per annum has particularly irritated President Lula, who is pressuring the BC for a drop in the price of credit in the country. In the last statement from the Central Bank’s Monetary Policy Committee (Copom), on May 3, the monetary authority not only kept the interest rate unchanged, but also signaled again that it could “return to the adjustment cycle”, if necessary. “The Committee assesses that the situation demands patience and serenity in conducting monetary policy. The Copom emphasizes that, despite being a less likely scenario, it will not hesitate to resume the adjustment cycle if the disinflation process does not go as expected,” said the text. This means that the BC will be able to raise the Selic again at another time, if necessary. However, this time, the Copom itself recognized, unlike the previous announcement, that this is a “less likely scenario”. The Committee also cited uncertainties about the design of the fiscal framework, which should be discussed in the Chamber of Deputies next week. The next Copom meetings to decide on the interest rate will take place on June 20th and 21st.

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