Inflation Spikes to 0.86 Percent in October, Highest for Month Since 2002

RIO DE JANEIRO, BRAZIL – Driven by the hike in food prices and airline tickets, the National Broad Consumer Price Index (IPCA), considered the country’s official inflation for many contracts, including residential leases, rose by 0.86 percent in October, above the 0.64 percent rate recorded in September, the Brazilian Institute of Geography and Statistics (IBGE) announced on Friday, November 6th.

This is the highest for the month since 2002, when the rate stood at 1.31 percent, and also the highest since December 2019, when it rose 1.15 percent. In October 2019, the variation had been 0.10 percent.

In 2020 to date, the IPCA has climbed 2.22 percent; it has also risen 3.92 percent inthe past 12 months, up from 3.14 percent in the immediately preceding 12 months. With the marked acceleration, the 12-month inflation is now just 0.08 percentage point below the center of the government’s inflation target for this year, which is four percent.

The result was slightly above that expected. The median of projections by 35 consultancies and financial institutions was of a rate of 0.84 percent.

Food continues pressure on

The highest variation (1.93 percent) and the greatest impact (0.39 percentage points) on inflation once again stemmed from the food and beverage category, although it decelerated over the 2.28 percent increase recorded in September. In the year, food inflation has accumulated a 9.37 percent hike.

Among the items that increased the most were basic products such as rice (13.36 percent, after a hike of 17.98 percent in September), soybean oil (17.44 percent, after an increase of 27.54 percent in September) and meat (4.25 percent, after a rise of 4.53 percent in September) stand out.

There was an increase in the variation of items such as tomatoes (from 11.72 percent in September to 18.69 percent in October), fruits (from -1.59 percent to 2.59 percent), and potatoes (from -6.30 percent to 17.01 percent). On the downside, the highlight reductions were the prices for onions (-12.57 percent), carrots (-6.36 percent), and garlic (-2.65 percent).

“Food has been the main driver of inflation in the past two months. Some foods, in particular, have pressured this rise, which are rice and soy oil, but there is also meat. Overall, this rise is related to supply, with the influence of the rising dollar on exports,” said research manager Pedro Kislanov, also mentioning the government’s contribution of the emergency aid to household income.

The second highest impact (0,24 percentage points) on the October IPCA came from transportation (1,19 percent), while the second-highest variation came from home articles (1,53 percent), with an increase of 2,38 percent on the prices of electronics and computer articles, also influenced by the dollar.

The result for each of the nine groups surveyed

• Food and beverages: 1.93%
• Housing: 0.36%
• Household articles: 1.53%.
• Clothing: 1.11%
• Transport: 1.19%.
• Health and personal care: 0.28%
• Personal expenses: 0.19%.
• Education: -0,04%
• Communication: 0.21%

Price increase becomes more generalized

Of the nine groups of products and services surveyed, eight showed an increase in October. The only drop was in the education group (-0,04 percent).

“We can say that the price increases are more widespread among the IPCA components,” said Kislanov, quoting the IPCA diffusion index, which rose from 63 percent in September to 68 percent in October.

The diffusion index indicates the spread of price increases among the products surveyed by the IBGE. In May, this indicator stood at 43 percent and has maintained an upward trend ever since.

Services inflation rose from 0.17 percent in September to 0.55 percent in October, the highest variation since February, when the indicator stood at 0.68 percent, reinforcing the interpretation of a more widespread price increase throughout the economy.

“It may be that we are currently in a time of economic rebound, because of some indicators, such as that of industry, which has fully offset the losses caused by the pandemic. But we are still in a very uncertain scenario, with an unemployment rate above 14 percent. So, we still need to wait,” opined the researcher.

Airline tickets up 39.83 percent

In the transportation sector, the highest variation came from airline tickets (39.83 percent), which represented the individual impact on the month’s index (0.12 p.p.) and the highest pressure factor in the rise of service inflation.

“The increase in airfares seems to be related to demand, given that with the relaxation of social distancing, some people have begun using the service again, which impacts the pricing policy of airlines,” said Kislanov.

The second-largest contribution in the group (0.04 p.p.) came from gasoline, with prices up 0.85 percent, decelerating compared to the 1.95 percent high observed last month. Another highlight was the voluntary vehicle insurance, with an increase of 2.21 percent, after seven consecutive months in decline.

Inflation is high in all regions

The IPCA increased in all 16 regions surveyed by IBGE between September and October. In only six of them was the increase less than the national average. The highest increase was recorded in Rio Branco, capital of Acre (1.37 percent).

According to IBGE, inflation in the city was driven by food, mainly meat (9.24 percent) and rice (15.44 percent). The lowest index was observed in the metropolitan region of Salvador, Bahia (0.45 percent), which was influenced by the drop in gasoline prices (-2.32 percent).

Perspectives and inflation target

Although the official inflation rate remains under control in the country, the rise in the cost of living has weighed more heavily on the pockets of the poorest. The FGV (Getúlio Vargas Foundation) index, which measures products and services price variation for families with an income between one and 2,5 minimum wages, has accumulated a 3,86 percent rise in the year and 4,54 percent for the last 12 months.

Despite the hike in food prices in recent months, inflation expectations for this year still remain below the government’s central target of four percent, although above the floor of the target system, which is 2.5 percent in 2020.

“The high dispersion of inflation is noteworthy. More and more products are rising in relation to the preceding month, thereby suggesting that prices are more affected by the shocks that have occurred this year and are now spreading more widely,” wrote Necton economist André Perfeito in a note to clients.

Financial institution analysts project an IPCA of 3.02 percent in 2020, according to the latest Central Bank Focus survey.

Itaú bank has now estimated inflation at 3.41 percent for the year. “The next IPCA results should continue to be pressured by the inflation of food and some industrial items, with an emphasis on household goods, electronics, and clothing. We projected a variation of 0.47 percent in November and 0.70 percent in December,” reported the bank.

Under the current rule, the IPCA may range from 2.5 to 5.5 percent without the goal being formally breached. The inflation target is set by the National Monetary Council (CMN). To reach it, the Central Bank either raises or lowers the economy’s basic lending rate (SELIC), currently at a historical low of 2.0 percent per year.

In recent months, with the bullish dollar and the rebound in economic activity, prices have begun to rise at a faster pace, particularly food.

In the minutes of the last COPOM meeting, the Central Bank assessed that pressure on inflation is ‘temporary’ and expects a ‘reversal’ in the rise in prices. However, the Central Bank toughened its message about potential room to cut the basic interest rate and stressed that it is attentive to the worsening of the country’s fiscal framework and the implications of rising public debt on monetary policy.

The market continues to expect the basic interest rate to be maintained at this level until the end of this year, rising to 2.75 percent by the end of 2021. In other words, SELIC is expected to rise again next year.

For 2021, the financial market has raised its inflation projection slightly, from 3,10 to 3,11 percent. Next year the central inflation target is 3.75 percent and it will be officially met if the index oscillates from 2.25 to 5.25 percent.

INPC for October up 0.89 percent

The National Consumer Price Index (INPC), a reference index for salary readjustments and social security benefits, rose 0.89 percent, above the 0.87 percent recorded in September. This is the highest result for a month of October since 2010, when the index stood at 0.92 percent.

In the year to date, the INPC has accumulated a 2.95 percent increase and 4.77 percent in 12 months, above the 3.89 percent recorded in the immediately preceding 12 months. In October 2019, the rate stood at 0.04 percent.

Source: G1

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