When will inflation subside? For economists, factors that raise prices will persist in the coming months

Inflation is on the rise and there is no expectation of relief in the short term. There are many factors that put pressure on prices – local and international – and hardly all of them will give way in the coming months. The increases in the basic interest rate promoted by the Central Bank have not yet been able to contain inflationary indices. In this sense, the Selic tends to remain at a high level for a long time and may even increase above expectations until the end of 2022. The assessment is made by different economists consulted by the InfoMoney.

This week, the Brazilian Institute of Geography and Statistics (IBGE) reported that the Broad Consumer Price Index (IPCA) hit 1.06% in April, the highest variation for the month since 1996. In the 12-month period, the indicator The official inflation rate was 12.13%, the highest level since October 2003. Food and beverages, in addition to transport, were responsible for the greatest impacts. On the other hand, the end of the water shortage flag in the electricity bill helped to contain the April IPCA in relation to March (1.62%). But the level remains high.

“The persistence of inflation is already happening. The core of inflation and the level of diffusion had a strong acceleration”, observed André Braz, from the Brazilian Institute of Economics (Ibre) of the Getulio Vargas Foundation (FGV). In April, the increases were spread over a larger number of items, with the diffusion rate at 78.25%, the highest since January 2003. In other words, inflation is more widespread.

Several factors pressure inflation not only in Brazil, but in the world. They have been accumulating since mid-2020, when, after a few months of paralysis at the beginning of the Covid-19 pandemic, international demand for products returned strongly, in the wake of stimulus packages launched by several countries. Supply did not keep up, there were production stoppages in China, logistics bottlenecks and general cost increases.

Before the situation completely normalized, came the invasion of Ukraine by Russia and a new lockdown in China, this time in Shanghai, reducing the supply of products on the international market – and once again disrupting supply chains. The interruption of trade with Ukraine and Russia caused the prices of products with a strong impact on the Brazilian economy, such as oil and derivatives, in addition to wheat, to skyrocket.

As it is impossible to know the duration and scope of the war, the prices of these commodities are likely to remain high. At the same time, new waves of contamination by Covid and more production stoppages in China cannot be ruled out, given the country’s zero-tolerance policy with the virus.

At the same time, as the current inflationary process is a worldwide phenomenon, the United States started to increase its basic interest rate, and the same should happen in other developed countries. The 12-month cumulative inflation in the US is at 8.3%. In this scenario, Brazil has already started to lose money from international investors, who prefer to invest their resources in bonds of mature economies when interest rates rise there.

Such a flow reversal has an impact on the exchange rate. The dollar rose again against the real after a period of low. “The exchange stopped helping. I don’t think the dollar will fall below R$5 again with the rise in interest rates in the US”, commented Marcelo Kfoury, coordinator of the Macro Brazil Center at the São Paulo School of Economics (EESP) at FGV.

The appreciated dollar makes imported products even more expensive. Items such as oil and wheat are at the base of the economy and impact everything from cooking gas to French bread. On the domestic front, the uncertainties regarding this year’s presidential elections may contribute to further devaluing the real.

Expensive fuel and food mainly penalize the poorest. Unemployment remains high and part of the population is emerging from the pandemic more impoverished. “The value of the basic food basket in relation to the minimum wage is at one of the most expensive levels in history,” said Alan Gandelman, CEO of the brokerage firm Planner.

food and light

For Kfoury, on the domestic front, some relief may be felt in the near future, depending on the outcome of the current grain harvest. In its latest survey, the National Supply Company (Conab) estimates a 6.4% increase in grain production for the 2021/2022 cycle compared to the previous one.

Commodities, however, remain at a high level due to factors external to Brazil, such as the war in Ukraine. “As long as the war lasts, two important areas will be affected: the supply of (industrial) inputs, also depressed by the lockdown in China) and the prices of oil, gas and other commodities such as wheat,” Gandelman said.

Kfoury, in turn, believes that the end of charging for the water scarcity flag in electricity should continue to have mitigating effects in the coming months. André Braz points out, however, that the readjustments being promoted by the distributors can frustrate this perspective.

Given the large number of factors that put pressure on inflation, most of which Brazil has no control over, economists estimate that the IPCA is unlikely to have a significant drop this year, although market professionals expect an index of 7.89% in 2022, according to the latest edition of the Central Bank’s Focus bulletin.

This estimate, however, has been rising week by week – and the last edition of Focus is on April 29, before the release of IBGE data. The bulletin is weekly, but its regularity is compromised because of the strike by BC employees. “The scenario is more for an increase than for a deceleration, and the short-term estimates only increase”, said Braz.

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interest in the heights

At the same time, the BC Monetary Policy Committee (Copom) increases the Selic rate. At the last meeting, in early May, the rate was increased by 1 percentage point, to 12.75% per year. The Copom started raising interest rates in March 2021, but the effects on inflation have not yet been felt.

This is because much of the inflationary pressure comes from costs – from supply – and is linked to external issues. There are, however, demand pressures and it is possible that some effect of the Selic hikes will start to appear soon. “It is not possible to know whether the increase in interest rates will have the desired effectiveness or not, but all over the world it works”, declared José Júlio Senna, from Ibre-FGV. “Inflation can take time to subside.”

Senna says that there is demand inflation, despite the weak performance of the Brazilian economy. According to him, the latest figures from the IBGE show that there was a “deviation” in the demand of families from the service sector to the consumer goods sector.

The economist recalls that the Auxílio Brasil, which has a higher value than the old Bolsa Família, and the authorization of extraordinary withdrawals from the Severance Indemnity Fund (FGTS) feed the demand for goods. The increase in public spending is another pressure factor.

“From the point of view of monetary policy, this is what can be done (raising interest rates). The contractionary policy helps to contain demand and signals that the Central Bank is attentive and committed to containing inflation”, highlighted Senna.

Anchoring

There are, however, doubts about the effects of such signaling. According to Braz, as interest rates rise and inflation does not subside, the Central Bank’s ability to “anchor expectations” decreases. In other words, the monetary authority cannot transmit confidence to economic agents that it will manage to contain inflation as planned.

In this logic, economic agents tend to expand their inflation projections and work from these expanded data. “Entrepreneurs pass on their expectations of price increases even before inflation manifests itself in costs,” explained Braz.

To avoid this anticipation of expectations, the BC needs to recover its anchoring capacity. “It’s important to have a few months of good inflation to change expectations,” noted Kfoury. In this sense, economists estimate that the monetary authority will keep interest rates at a high level for a long time and there may be increases beyond what was expected.

In the minutes of its last meeting, the Copom foresees a new increase at the next meeting, but of a “smaller magnitude” than the one held at the beginning of May. In the last Focus bulletin, the forecast was that the Selic rate would be at 13.25% at the end of 2022. “The Copom signaled to stop (the increases) in June, but it needs to agree with the Russians, literally and metaphorically”, said Kfoury, in a statement. reference to the famous phrase attributed to the star Mané Garrincha.

Analysts estimate that interest rates may rise more than expected. Gandelman, for example, believes that an increase of 1 percentage point is possible at the next Copom meeting and another of half a percentage point by the end of the year, raising the 2022 Selic to 14.25%. For Kfoury, after the June meeting, any additional increases should only take place after the elections.

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Inertia

Braz adds that the inflation of 2022 will have effects in 2023, given the high degree of indexation still present in the Brazilian economy. Increases in rents, school fees, health plans and others are carried over from one year to the next. “Even with the high interest rates, indexation, by inertia, holds the transfers until 2023”, he declared.

The fact is that the inflation targeting regime has been broken. Last year, the target was 3.75%, but the IPCA was 10.06%. In 2022, the target is 3.5%, and it will not be reached. The target for 2023 is 3.25%, and it will most likely not be honored either. “It will be three years in a row when the goal is exceeded”, stated Kfoury.

Braz points out that there is no other instrument that is “as forceful” to contain inflation as raising interest rates. Outside of monetary policy, he says that some measures could have an effect, such as expanding the reserve requirement of banks and raising taxes. These measures, especially the last one, are considered impossible in an election year.

“Monetary policy goes one way, but on the other there is a government wanting to be re-elected”, observed Brás. President Jair Bolsonaro (PL) is a pre-candidate for re-election.

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