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Experts warn that the downturn will not last long

Published on 08/28/2022 06:00

(Credit: Minervino Júnior/CB/DAPress)

The record 0.73% drop, in August, in the Expanded Consumer Price Index 15 (IPCA-15) – a preview of official inflation – raised the chances of a second month of deflation. With data released last week by the Brazilian Institute of Geography and Statistics (IBGE), analysts are starting to revise the cost-of-living index forecasts again at the end of this year – ranging between 6.5% and 7%.

However, according to experts heard by Correio, caution should be exercised, because the inflation dragon has not been fully tamed. The volume is high and persistent, both in Brazil and around the world. Here, famine is widespread in the economy, with 63% of the items surveyed registering price increases, according to IBGE data.

Analysts point out that the current downturn is not sustainable, because the latest drop in fuel taxes has an expiration date – December of this year. As they explained, this is a sign that the measures adopted have only an electoral objective and have no strategy to control inflationary pressures. The risk is a more aggravating scenario in the near future. When taxes are reconfigured next year, inflation may return, perhaps even more strongly.

Despite considering the possibility that the country will experience “two to three months” of deflation, the head of the Central Bank, Roberto Campos Neto, did not celebrate the price drop, because food prices are still higher than the monetary authority’s expectations. “We think we can’t let our guard down,” he said last Friday at an investor event.


In Brazil, which has a history of hyperinflation haunting neighbors in crisis – such as Argentina (71% annually) and Venezuela (137%) – the IPCA has been running in double digits since September 2021. In addition to the surge in commodity prices, investor mistrust regarding With the issue of public finances to increase the value of the dollar and increase the demand for risk premiums on interest rates on public bonds.

“The current deflation is not structural because prices are not falling due to fixed factors. It is still a political-economic action by the government, which is using the tools it has. But the official deadline for this tax cut is until December. And there may be an impact on the rebound at the beginning of 2023. , when there is a return, which leads to more inflation due to cross-chain transfers,” explained the chief economist at Mirae Asset, Julio Hegedus.

Economist Simao Devi Silber, professor at the University of São Paulo (USP), understands that this downturn is temporary and should cause prices to rise again next year. “These electoral measures work in the short term, but they do not help to promote the deflationary process. They only affect the price, without changing the inflation structure in the economy. On the other hand, government tax cuts break the federal agreement,” he explained.

In the expert’s assessment, Brazil has an inflation problem that affects the poorest and that it is essential that it be at the center of the electoral debate. He stressed that “inflation is a corrupt tax. The first policy that the administration should follow is no inflation.”

But for the government, high inflation is a good thing from a nominal point of view because it helps raise revenue and reduce public debt – it increases nominal GDP, which is the denominator in calculating the overall public debt rate. The fuel tax cut contributed to a 4.51% drop in the IPCA’s transportation pool for July, according to IBGE data.

On the other hand, prices in the food and beverage group – which most affect the cost of living of poor families – remain high, with increases cumulative in the 12 months to July (14.72%), above 10.07% of official inflation. ..

Despite President Jair Bolsonaro’s (PL) election speech, Brazilian inflation is one of the highest among the 15 largest economies on the planet, in the 12-month period through July. The country ranks 12th in the global ranking by GDP for 2021 and had the fourth-highest inflation last July, losing to Russia (15.10%), the United Kingdom (10.10%) and Spain (10.80%) according to data from Trading Economics.

“Deflation helps a lot to bring down inflation this year, but keeps the risks high for next year. The uncertain financial situation may continue to hurt inflation and what could help weaker commodities with a possible global recession. In theory, that would help inflation, but it would depend on the financial situation.” The good is on its way to controlling the exchange rate and here there are many risks”, explained Sergio Vall, chief economist at MB Associados.

Economist Alessandra Ribeiro, partner at Tendências Consultoria, estimates that even with this deflationary scenario, British Columbia will not abandon a stronger monetary tightening and should make another hike in the economy’s core rate in September. As a result, the interest rate is supposed to rise from 13.75% to 14% per annum, a level that should remain until June 2023.

“Inflation is very persistent and widespread, and the government is not helping on the fiscal side, which makes it difficult for the Bank of British Columbia to bring the International AIDS Accord (IPCA) closer to the target,” he explained.

Short trip contraction
Short trip contraction
(Photo: Art/CB)

far horizon

Structural inflation is one of the main problems faced by the Central Bank (BC) to deliver the country’s official inflation within the target. With the increase in 2021, the monetary authority was unable to reduce the rate below the 5.25% ceiling, and analysts agree that this will be repeated this year and next.

Eduardo Filho, chief economist at JF Trust Gestora de Recursos, estimates this structural inflation is around 4%. Therefore, he asserts that the Basel Agreement should have difficulty achieving the target set for 2024, which is 3%.

“This is structural inflation, so Brazil is very far from achieving the 3% target or close to the target for developed countries,” he noted.

In the opinion of Roberto Padovani, chief economist at Banco BV, there are two analyzes in the market: first, that inflation has begun to decline after peaking between April and May. The second is that BC will not be able to meet the target this year and 2023. The convergence of inflation to the target will be slow, and this should only happen in 2024.

a challenge

The inflation ceiling for this year is 5%, and even with the ongoing downward revisions, the most optimistic forecast for the IPCA in December is above this level – it is between 6% and 6.5%.

“There are still many factors influencing BC to control inflation. One of them is that the current target, of 3.5%, will fall to 3% by 2024. This is one of the most challenging points of monetary policy behavior,” Padovani highlighted.

The specialist kept expectations at 5.50%. According to BV forecasts, the IPCA in 2023 will end the year at 5.5% and remain above the target ceiling of 4.75%. He stressed that “inflation will fall from its peak of 12% to 5.5% next year, but to reach 3% in 2024, it will require more monetary policy.

Jose Marcio Camargo, chief economist at Genial Investimentos, points out that current inflation is largely the result of a supply shock. Even with lower taxes and the current scenario of deflation, the IPCA will still be above target this year and into 2023.

He explained that “the problem is not just an indicator of the economy, but rather in the supply, which is more difficult to increase than demand, because it depends on a set of decisions made over time.”

Luis Ottavio de Sousa Lille, chief economist at Alfa Bank, highlighted that the market underestimates the inflationary stagnation of this year, which will be inherited in 2023. In order for inflation to fall, a higher level of inflation will be required. He asserted that “to achieve the objective, it is necessary to raise the base rate of interest. In other words: for the same situation, we will have higher inflation.”

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