Brazil’s inflation is Latin America’s 3rd highest, behind Argentina and Haiti

RIO DE JANEIRO, BRAZIL – In the 12-month period through July, Brazil’s inflation reached 9%, while Argentina’s totaled 51.8% and Haiti’s 17.9%. The data are part of a study conducted by the Getúlio Vargas Foundation’s Brazilian Institute of Economics (IBRE).

The study does not take into account Venezuela’s performance. The country is undergoing an economic collapse and presents distorted indicators, which make it impossible to compare it with other economies.

“With uncertainty growing and interest rates at 2% – at the start of the year – no one wanted to stay here. Investors turned to safer markets and this helped devalue [Brazil’s] currency,” the study points out.

The study data clearly show that the Brazilian inflationary picture has worsened more than in other countries. Late last year, Brazil ranked 6th among the region’s economies with the highest inflation.

After overcoming the most critical stage of the pandemic, inflation has become a worldwide problem. The rise in commodity prices has added to the disruption in production chains – the health crisis has paralyzed or reduced production in many industrial sectors. This disruption has led to product shortages, thereby pressuring production costs.

The key point is that the pace of inflation in Brazil has surprised and worried analysts. Today, they say that the rise in prices has spread to a large part of the economy.

In the Focus report, analysts consulted by the Central Bank have worsened weekly forecasts for the National Wide Consumer Price Index (IPCA). They project that inflation will close this year at 7.58%, well above the 3.75% target set by the government.

WHY HAS BRAZIL’S INFLATION WORSENED?

Brazilian inflation has been pressured by the hike in food prices since last year, as a result of the rise in commodity prices.

The increase of basic items – such as soy and corn – in the international market and the loss of value of the Brazilian real (R$) led to an increase in exports, which caused a supply shortage in the local market and, consequently, an increase in prices.

According to analysts, the Brazilian real was expected to appreciate in value throughout 2021 and, therefore, inflation could decrease – in the first Focus report this year, economists were forecasting 3.35% for the IPCA.

But the fiscal uncertainties and, recently, the institutional crisis caused by President Jair Bolsonaro prevented a drop in the value of the dollar. The combination of these scenarios is causing capital flight from Brazil, affecting the Brazilian currency.

“Since late last year, uncertainty has been related to how Brazil is going to emerge from the pandemic, if we are going to maintain the fiscal rules. This greatly impacts the exchange rate.”

In the fiscal area, for example, the government still hasn’t specified how it is going to fit into the spending cap the multi-billion expenses with court-ordered federal debts and the new social program, “Auxílio Brasil” (Brazil Aid), an expanded version of the “Bolsa Família” (Family Grant).

The inflationary picture has worsened even further because Brazil is now facing an increase in fuel prices and a severe water crisis, which is being tackled late and timidly by the federal government, according to experts.

There have been several consecutive increases in Brazilians’ electricity bills. Last week, the National Electric Energy Agency (ANEEL) created the water scarcity tariff flag and readjusted the energy bill once again. In September, the new increase in electricity bills should reach almost 7%.

WHAT TO EXPECT IN THE FUTURE?

Credit Suisse projects that the IPCA will close this year at 7.7%. With price hikes spread across virtually the whole economy, Brazil is also starting to experience a resumption of inflationary inertia.

The price hikes in 2021 should influence contract readjustments – such as for schools and health plans, for instance – for next year. Therefore, this should all impact prices in 2022.

For 2022, the bank expects an increase of 5% in the IPCA, also above the government’s 3.5% target center.

But forecasts for next year may worsen further. Economists are still unable to estimate the full impact of the new increase in the electricity bill. According to ANEEL, the new tariff flag should be in force until April next year.

Thus, despite a strong increase in the basic interest rate, the Central Bank should struggle to contain the price hike, because, with the increase in the price of material goods, fuels and electricity, the country is faced with inflationary pressure through rising cost, not demand.

In practice, when the Central Bank raises interest rates, it aims to slow down the economy, restraining household consumption, with the goal of containing price escalation. Now, the situation seems to be different.

“This inflationary pressure will be more difficult to contain. When the Central Bank raises interest rates, it sends the following message to families: save your money now because the return on investment will increase with higher interest rates. So, if you defer consumption, your reward will be a higher return,” IBRE researcher André Braz says.

“Therefore, the expectation is to take money out of circulation, to dry up the monetary base, in order to have lower inflation,” he adds.

The basic treasury interest rate (SELIC) currently stands at 5.25%. In the Focus report, economists estimate that it should rise to 7.75% by the end of next year.