Inflation spreads, reaches 78% of prices, and families are left with no way out

The rise in prices in Brazil has spread throughout the economy in recent months and has reached almost eight out of ten products that make up the IPCA (Broad Consumer Price Index), the official inflation indicator. The IPCA reached 1.06% in April, the highest rate for the month since 1996. Data from the IBGE (Brazilian Institute of Geography and Statistics) show that, in the month, the IPCA diffusion index was 78.3%, the highest since January 2003 (85.9%).

The diffusion index measures the amount of products and services, within the IPCA, that registered inflation (price increases) in a given month. If soybean oil or rice prices rise, for example, they contribute to higher diffusion. Currently, 377 are in the basket of products monitored by the IBGE to measure inflation.

A reflection of the diffusion index for the daily lives of families is the increasing difficulty of escaping from high prices when they go shopping. In addition, the large number of products with rising prices can feed into inflation itself.

One of the main examples is that of diesel oil: as it serves as an input for transport, the rise in fuel ends up pushing other prices, such as food prices. This also applies to electricity.

“Energy is in everything, so it ends up making price formation more expensive. It makes everything more expensive”, exemplifies economist Fábio Romão, from the economic consultancy LCA. “If you are going to provide a service, you use electrical energy. If you are going to manufacture something, you also use energy.”

Inflation spread across products and services

IBGE figures show that inflation has spread in recent months. In February 2020 — before the start of the covid-19 pandemic — the diffusion indicator was 49.3%. It dropped a little more, reaching 43% in May 2020. But it started to rise the following month, reaching the current 78.3%.

Diffusion is both a consequence and a cause of high inflation, explains Flavio Serrano, chief economist at Greenbay Investimentos.

There is a somewhat more persistent inflation process than initially expected. In such an environment, there begins to be greater dispersion of price increases. So one thing leads to another: high inflation is producing high diffusion; and high diffusion should make the deceleration of inflation slower.
Flavio Serrano, chief economist at Greenbay

In other words, products and services influence each other, and inflation ends up spreading across the different items. In this environment, it becomes more difficult to promote product substitutions, because almost everything becomes more expensive—yes, that’s not just a feeling.

In April, for example, the rump rose 0.78%, and the duckling rose 1.85%. Those who ran for whole chicken as an alternative paid 2.39% higher prices. Not even those who gave up meat and sought the chicken egg had relief: it rose 2.19%.

Why did inflation spread?

Economist Fábio Romão, from LCA, explains that inflation spread due to shocks — unexpected economic events — that occurred in recent months.

He cites the covid-19 pandemic, which increased the prices of commodities (raw materials such as soybeans, corn and oil) and inputs for specific sectors, such as the automotive sector. In addition, there have been events, such as the drought, that have helped drive up energy and food costs.

More recently, the war between Russia and Ukraine has once again boosted commodities. Another factor is the lockdowns in China, which have affected the shipment of goods to other parts of the world, including Brazil.

“Brazilians also returned to circulate in the cities [com o avanço da vacinação]. So our demand for services is higher, which influences prices,” he says. “Unfortunately, there are pressures everywhere we look.”

How long will inflation continue to spread?

Diffusion should begin to decrease from the second half of the year, according to economists. The rise in the Selic (the basic interest rate), promoted by the Central Bank, tends to have a greater effect on prices.

Since March last year, the BC has been raising the Selic rate to contain the IPCA. In the period, the basic rate went from 2% to 12.75% per year. With higher interest rates, credit also becomes more expensive and, at the limit, consumption decreases. The result is that companies are left with less room to markdown prices.

With the high interest rates, the BC does not seal price readjustments. Or at least it makes the entrepreneur who thought of raising some price by BRL 100 only increase by BRL 50. [A alta da Selic] It is a bitter medicine, because it affects economic activity to, in a second moment, affect prices.
Fábio Romão, economist at LCA

Greenbay’s Serrano expects relief in the second half of this year or early 2023. “There will come a time when monetary policy [alta da Selic pelo BC] will start to take effect”, he says. “Then we will see the economy losing strength and, with that, companies will have less capacity to pass on prices to the consumer.”

For economist Mailson da Nóbrega, who was Minister of Finance between 1988 and 1990, with the spread of high prices, the deceleration of inflation will be slower. “With a price diffusion index above 70%, inflation is more resistant to [alta de juros]”, it says.

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