Rent, PF, health and school: inflation is not over yet – 07/11/2023 – Vinicius Torres Freire

On average, prices dropped 0.08% from May to June. Annual inflation, the IPCA accumulated over the last 12 months, dropped to 3.16%. The news is good, but there are still fires in prices; an annual IPCA that low is a little illusory.

Other inflation measures are important because the Central Bank will pay attention to this when it decides on the rate at which the Selic, the basic interest rate, will fall in the very short term. They also matter because life is still difficult, of course, considering some very important price increases.

In any case, we are not in a process of falling prices that is symptomatic of a dramatic cooling down in consumption or in the general pace of the economy; not even the interest medicine was useless because the disease began to pass, as the PT leadership believes.

In the last 12 months, the price of health plans increased by an average of 14.5%. Eating out was 7.2% more expensive. Schools, courses etc. had an increase of 8.3%. Rents, 6.6%. As a whole, services inflation is still at 6.2% a year; services in which prices react more to the pace of economic activity, at 6.7%.

The drop in prices has come from goods that tend to fluctuate a lot (“volatile”) and not necessarily because of the pace of the economy. That is, the cost of food that is prepared at home, which can also cost more or less because it rains a lot or little, because of large or small harvests, here or in the rest of the world. In the relevant case now, the decrease has also come from fuel prices, which have fallen due to the cooling of the global energy crisis and the impact of Putin’s war, the slowdown of the world economy and the fall of the dollar, in addition to a collaboration additional from Petrobras.

Is bad? Of course. Lower inflation in “volatile prices” is lower inflation, period. Even a transitory drop in food and fuel prices dehydrates general average inflation, the IPCA, which helps to contain price contamination in the future (decreases indexation, inertia, expectations). But, it should be noted, such prices are volatile, a risk.

However, inflation resists in services, in part because the labor market is still relatively heated. It is very likely that the persistent high cost of services will lead the Central Bank to lower the Selic rate at the drop rate, everything being constant.

Taking inflation and expectations to the 3% target in 2024 is important for Lula 3. It allows the Selic to fall more and faster. It reduces the risk that a somewhat higher growth will cause a new increase in interest rates towards the end of 2025. It allows for the accommodation of shocks and other misfortunes in life.

There are risks. If inflation and interest remain high in the rich world, the Selic floor here in Brazil should also be higher. If the government doesn’t raise enough money (plus tax revenue) to contain the deficit, interest rates fall less.

Still, there are improvements. They continue to lower interest rates in the bulk of the money market, where the costs of financing debt and government deficits and the floors of the cost of credit in the economy in general are defined.

The rate for the three-year term fell to just over 10%. They went to 13.6% in November, when President Luiz Inácio Lula da Silva started to make those mistaken speeches about the public debt and the inflation target.

The reduction of so-called “long” rates helped, for example, to revive the capital market, where companies raise money for working capital, investment in infrastructure or debt refinancing. High interest rates and the fear provoked by the fraud of the Americanas had brought down that market this year. In June, there was considerable recovery.

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