Service inflation still exerts pressure and should push IPCA above the 2023 target

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With a drop of 0.08% in June, the country has accumulated inflation of 3.16% in the 12-month window and reaches the fourth month within the target. Despite acknowledging relief in the indicator, analysts see ‘one-off effects’ that should leave the calculation basis soon. Service sector brings together bars, restaurants, beauty salons, hotels and many others Fábio Tito/g1 In a frank deceleration for more than a year, the Extended National Consumer Price Index (IPCA) recorded a drop of 0.08% in June, in the first deflation of the year. With an accumulation of 3.16% in 12 months, the indicator is, therefore, four months within the inflation target. The Central Bank (BC) is obliged to place Brazilian inflation within the target range, by increasing or decreasing the basic interest rate, the Selic. The center of the target is 3.25% this year, but the target will be considered met if the IPCA stays between 1.75% and 4.75%. In theory, target inflation makes room for a sharper reduction in interest rates in the country. But there is a fear on economists’ radar that prevents greater optimism and that should even put the index back outside the tolerance range in the coming months: service inflation. The services division is one of the main metrics monitored by the BC for a possible Selic reduction, as it incorporates a basket of prices pressured by demand. In the group are important (and stubborn) items for a full reduction in prices, such as residential rent (which increased by 0.78% in June) and condominium (1.67%), tourism packages (1.02%) , cinema, theaters and concerts (1.05%). In June, the division that brings together important items of the country’s demand inflation increased by 0.62%. With the IPCA around 3%, the accumulated services in 12 months runs twice as high: 6.21% since June last year. “The IPCA showed acceleration in the services core, which rose from 0.32% in May to 0.53% in June, excluding airline tickets and education. Important service items and food away from home remain under pressure”, says Luíza Benamor, inflation analyst at Tendências Consultoria. IPCA drops 0.08% in June and has first drop in 2023 Projections above the target Tendências’ projection for the IPCA in 2023 is 5.06%, above the market average measured by the BC’s Focus Bulletin. The report that brings together the opinion of a hundred analysts also points to an index outside the target, of 4.95% at the end of this year. In addition to the reinforcement in services, there is also the exit from the fuel exemption, introduced by former President Jair Bolsonaro to combat inflation in an election year and which should leave the IPCA calculation base in the coming months, increasing the indicator in the 12-month window. months. For Benamor, however, the result of June inflation reinforced the positive signs of recent months. In addition to the reduction in cores, there was a decrease in the inflationary diffusion index, which is the measure of the spread of price increases in the various items of the economy. In other words, this indicates more contained inflationary pressures. “However, as much as these signs are positive, the combination of specific factors that led to the fall in the month challenges the convergence to the target this year”, says the economist. Benamor mentions the reduction in food prices at home, due to record grain harvests this year and the dollar exchange rate, and the zero car discount program promoted by the federal government, which has already ended. According to calculations by André Almeida, researcher responsible for the IPCA at the IBGE, prices in June would have registered an increase of 0.03% without the reduction in the value of new and used cars. ‘It will be very annoying if you don’t cut the interest rate’, says economist after IPCA result it is precisely food at home that creates a possibility of convergence of the IPCA to the target in 2023. The main decrease within the group of Food and beverages (-0.66% in June) came from the subgroup, which accumulated a decrease of 1.07% in the month. “It still depends on rain for the rest of the year, and we have an El Niño on the radar. If it is not very strong, we may have a rise of just 1% in food for the year. This could take the IPCA below 4.70%”, says the economist. Conditions for falling interest rates Even though services inflation is a thorn in the side in Brazil (and abroad, by the way), the perspective is that it will not hinder the beginning of interest rate cuts in the country. Andréa, from Warren Rena, says that, as the speed of cooling is below the projected, this can only reinforce the arguments of the more cautious wing of the Monetary Policy Committee (Copom). Luíza Benamor, from Tendências, says that the BC’s posture was consistent with the process that was being observed of discouraging expectations, but that the medians of Focus started to fall recently. Both expect a 0.25 percentage point cut in the Selic rate at the next Copom meeting, in August. As a g1 report showed, the environment for the Selic reduction is already favorable. The main reasons for this are: Brazil started its process of raising interest rates before the rest of the world and, therefore, manages to start bringing inflation close to the target while other countries still face greater pressure on prices; A good part of the deceleration in inflation in the last year was due to the reduction in fuel prices, but the return of taxation in July should be offset by the reduction in the value of oil abroad; There is no factor, internal or external, on the radar that could lead prices to rise significantly until the end of the year, which should keep inflation close to the Central Bank’s target; The fiscal framework brings more peace of mind to the market and helps anchor expectations for inflation, as they indicate greater control of Union spending; The dollar is experiencing a period of devaluation in Brazil and in the world, and this also helps to keep prices within the country under control.

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