IPCA has deflation of 0.08% in June, says IBGE – 07/11/2023 – Market

With the reduction in car, food and fuel prices, the IPCA (National Index of Broad Consumer Prices) had a deflation (fall) of 0.08% in June.

It is the first time that the official inflation index is negative in nine months, informed this Tuesday (11) the IBGE (Brazilian Institute of Geography and Statistics).

The last deflation had occurred in September 2022 (-0.29%). At the time, the economy was experiencing the effects of tax cuts promoted by the Jair Bolsonaro (PL) government on the eve of the elections.

Considering only the months of June, the drop is the first and the biggest since 2017. At the time, the drop had been 0.23%.

The negative variation was close to the median of market projections. Analysts consulted by the Bloomberg agency expected a 0.10% decline, after the 0.23% advance recorded in May.

With the new result, the increase accumulated by the IPCA in 12 months slowed down to 3.16% until June, the lowest level since September 2020 (3.14%). The advance was 3.94% in the previous disclosure.

Cars, food and gasoline retreat

Of the 9 groups of IPCA products and services, 4 showed a drop in June. The highlights were food and beverages (-0.66%) and transportation (-0.41%).

The two segments contributed -0.14 percentage points and -0.08 percentage points, respectively, to the index for the month.

The drop in food and beverages is mainly due to the decline in household food prices (-1.07%), which had remained stable in May.

The reductions in soybean oil (-8.96%), fruit (-3.38%), long-life milk (-2.68%) and meat (-2.10%) stand out. Potatoes (6.43%) and garlic (4.39%), on the other hand, rose in price.

In the transport group, the result was influenced by the decrease of new cars (-2.76%) and used cars (-0.93%).

According to the IBGE, there was influence of a specific factor, the federal government program for discounts on popular cars. New cars made the main contribution, in individual terms, to the June deflation (-0.09 percentage points).

Still in transport, the institute highlighted the decline of fuels (-1.85%) with the falls of diesel oil (-6.68%), ethanol (-5.11%), vehicular gas (-2.77 %) and gasoline (-1.14%). Airfares, on the other hand, rose 10.96%, after falling 17.73% in May.

IPCA and interest

The IPCA serves as a reference for the BC (Central Bank) target regime. In 2023, the center of the inflation target pursued by the monetary authority is 3.25%. The tolerance range is 1.5 percentage points more (4.75%) or less (1.75%).

With the IPCA truce, President Luiz Inácio Lula da Silva (PT) and allies have been pressing the BC for a reduction in the basic interest rate, the Selic, currently at 13.75% per annum.

The Copom (BC Monetary Policy Committee) will meet again on August 1st and 2nd to define the Selic level. Before the release of the IPCA for June, financial market analysts were already projecting the start of basic rate cuts in August.

The double-digit Selic has been the Central Bank’s strategy to contain prices and anchor inflation expectations. The expected side effect is the loss of momentum in economic activity, because the cost of credit is higher for business investments and household consumption. This scenario worries Lula and allies.

On the median, financial market analysts project IPCA of 4.95% in the accumulated until December of this year, according to the most recent edition of the Focus bulletin, released on Monday (10) by the BC.

This means that, for now, estimates indicate IPCA above the target ceiling in 2023 (4.75%). The difference between the projections and the limit of the reference measure, however, has been getting smaller in recent weeks.

Inflation forecasts have been revised downwards amid a scenario of loss of strength in wholesale prices, which reflects on the final consumer in retail.

In July, the IPCA should be pressured by the return of the full collection of federal taxes on fuels. Last week, a liter of gasoline rose by 5.8% at Brazilian service stations, according to a survey by the ANP (National Agency of Petroleum, Natural Gas and Biofuels).

The impact of the deflations registered in the second half of 2022 should also leave the IPCA calculation base for the accumulated 12 months until the end of 2023. This should contribute to a greater variation until December than the current one, according to analysts.

On the eve of last year’s elections, the prices of products and services such as gasoline and energy were artificially reduced by the cut in taxes promoted by the Bolsonaro government.