Brazil Inflation Hits 4.52% in 2020, Highest Since 2016

RIO DE JANEIRO, BRAZIL – With a 1.35% rise in December, largely driven by higher electricity bills, the Broad Consumer Price Index (IPCA), the country’s official inflation indicator, closed 2020 up 4.52%, the highest since 2016.

The result, announced this Tuesday, January 12th, by the Brazilian Institute of Geography and Statistics (IBGE), was over the 4.0% target pursued by the Central Bank (BC), with a tolerance margin of 1.5 points plus or minus. In the year marked by Covid-19, food prices set the tone.

When the pandemic hit the economy, causing a global recession, the IPCA reached negative rates. With activities paralyzed, prices plummeted in the first months of social isolation, particularly of services. All projections at the time pointed to an IPCA lower than the Central Bank’s target made last year.

The scenario changed from mid-last year. With the concentration of demand on basic items and the bullish dollar, food for domestic consumption began to rapidly rise. It closed 2020 with an increase of 14.09%, the highest since 2002, when it reached 19.47%.

The National Electrical Energy Agency’s (ANEEL) decision in December to adopt the red flag – an additional charge on the electricity bill to offset the increased use of thermal plants, which are more expensive than hydroelectric – was the only step left for the 2020 IPCA to exceed the target.

The additional charge on the cost of electricity was announced in early December, and was therefore considered by economists before the announcement of the December IPCA. The latest Broadcast Projections survey of financial market analysts projected the 2020 IPCA at 4.38%.

Since the increased food prices hit the radar in mid 2020, economists have been pointing to the temporary nature of the hike. Even if food inflation has continued – which mainly affects the poorest families – this temporary aspect remains within the analysts’ scenario. The same is true for the electricity bill, given that the additional charge by ANEEL is caused by the low level of hydroelectric plants’ reservoirs due to lack of rainfall.

Hence, projections for 2021 point to an annual IPCA of 3.30%, against a Central Bank target of 3.75%, lower than this year’s, with the same 1.5 point margin. With projections pointing closer to the goal, a Central Bank reaction, with a rise in the basic interest rate – the SELIC, currently at 2.0% per year – to contain demand, should not be hastened because of last year’s IPCA final reading.

According to Alexandre Lohmann, an economist with GO Associados, although there are plenty of reasons for inflation to remain high in the coming months, “it will be very difficult for the IPCA to fall short of the range” of the Central Bank’s target in 2021.

“We can again reach 4.0%, and if this scenario materializes, the Central Bank should begin to raise interest rates little by little, to show that it is concerned with inflation,” stated Lohmann.

For other economists, such as Daniel Karp of Santander Bank, the weak economy and the gradual rebound in the unemployment rate should build a scenario unable to produce great inflationary pressure. Therefore, Santander believes that the IPCA will close 2021 at 3.0%, with even less need for a reaction from the Central Bank.

“Our projection for the SELIC is 2.50% by the end of the year, with two rises of 0.25 percentage points each at the end of the year, in the penultimate and last meeting. It is a lower figure than the market expectation, but it is based on our inflation outlook. We believe that economic idleness will still be high by 2022,” said Karp.