A confluence of factors since the start of the pandemic has helped keep inflation under pressure. In March 2020, at the start of the pandemic, the midpoint of financial institutions’ expectations was inflation of just 3.7% in 2021, according to the Central Bank’s Focus report. Today, after 19 consecutive weeks, the forecast is 7.12%.
And to reach this level – which is well above the upper limit of the inflation target pursued by the BC, of 5.25% – inflation will have to decelerate significantly in the coming months. Indeed, it is now around 9% per year – more precisely 8.99%, according to the cumulative IPCA in 12 months until July.
Along with the various factors that were already putting pressure on inflation, the federal government added a problem: fiscal risk. In recent weeks, the market has come to fear that the proximity of elections could lead to a lack of control over public accounts – which has worsened the outlook for inflation in 2022, amid rapidly rising dollar and rates. of future interest. Central Bank President Roberto Campos Neto has issued at least two alerts on the matter in a four-day interval.
“We are living in a perfect storm”, summarizes the researcher and economist Matheus Peçanha, of the Brazilian Institute of Economics of the Getulio Vargas Foundation (Ibre / FGV). The rise in raw materials, the dollar, the break in production chains, fuel, electricity, refrigeration and the return to activities and services are part of the list of explanations for analysts to justify the rise in prices.
Tendências Consultoria’s senior economist Sílvio Campos Neto points out that there are a number of problems on the supply side, which occur and complicate the fight against inflation.
The most recent are the water crisis, which has forced the price of electricity to rise, increasing industrial costs; cold, which affects food, especially horticultural products; and resumption of activities. Airline tickets, for example, were 35.22% more expensive last month.
Itaú economists believe that transitory factors are pushing up prices. In a report published on the 12th, they point out that, despite economic growth significantly above potential this year, the economies [da América Latina e do Caribe] continue to operate with a lot of unused capacity.
“However, high commodity prices, scarcity of specific inputs, higher prices charged for reopening sensitive services, and (in some cases) weaker currencies are driving inflation up.”
For MUFG Brazil bank chief economist Carlos Pedroso, the rise in annual inflation lasts until this month and then declines, reaching the level of 7.2% in December. “The 12-month price variation is heavily contaminated by past inflation. From January to July, fuels, electricity and food increased sharply. “
He emphasizes that the problem is not limited to Brazil. Other economies, faced with the scenario of a recovery in global demand, are also experiencing the problem. The International Monetary Fund expects the global economy to grow 6% this year, following a decline of 3.3% in 2020.
The recovery in demand is encouraging the rise in oil prices. Since January, the price of a barrel has risen 38% in dollars, according to the platform Investing.com. This was reflected in the price of fuel. Data from the Brazilian Institute of Geography and Statistics (IBGE) show that since then the liter of gasoline has been corrected by 27.5%; diesel 25.8% and cooking gas 20.9%.
“Bad luck” in the fight against inflation
According to Peçanha, from Ibre / FGV, the central bank has been unlucky in the fight against inflation, having to deal with one problem after another on the supply side. Since March, the base interest rate (Selic) has increased. It has gone from 2% per year to 5.25% and is expected to increase further in future meetings.
Campos Neto, of Tendências, believes that the BC did what it could during the pandemic, adopting a more expansionary monetary policy, taking the Selic rate to an all-time low of 2% per year.
Further interest rate hikes are expected in the coming months. The most recent projection published in the Focus Report indicates a Selic of 7.25% at the end of the year. But XP Investimentos warns that if the risk of fiscal deterioration materializes, the base rate could be above 9% at the end of the monetary adjustment cycle.
The first effects of the Selic rate hike are already being felt, with the exchange rate no longer advancing and the stagnation of the deterioration in expectations for 2022, specifies the economist of Tendências. But the strongest impacts, such as the slowdown in economic activity, should not be seen until next year.
Peçanha believes that the Monetary Policy Committee (Copom) could be a little more daring. “The budget orientation law [LDO, uma prévia do próximo Orçamento] came by projecting a higher than expected deficit. And that indicated very high expenses, as is the case with the Election Fund.
Analysts consulted by Gazeta do Povo note an absence of fiscal concerns, despite the fact that the first half of the year was marked by a more positive tone in the public accounts, mainly driven by the strength of tax revenues.
In the first half of the year, federal collection saw real growth (already discounted for inflation) of 5.8% compared to the same period of 2019, when there was no pandemic. And, throughout the year, the 12-month accumulated primary deficit fell from 9.4% to 3.8% of GDP, pushing the gross debt down from 89% to 84% of GDP.
XP Investimentos underlines that the performance of regional governments is historically strong “in the wake not only of the boxes provided since last year’s transfers and of the debt renegotiation program with the Union, but also of a robust recovery, including ICMS ”.
But the effect of the improvement in public accounts was short-lived, impacted by the uncertainty that weighed on the long-term fiscal path. “Side discussions end up having a negative impact on expectations,” says Peçanha, from Ibre / FGV. Among them are discussions on the sources of financing of Auxílio Brasil, with values and an extension higher than those of Bolsa Família, and the increase in payments planned with court rulings.
According to the economist de Tendências, a firmer fiscal stance is needed to avoid increased risks.
In an interval of four days, the President of British Columbia, Roberto Campos Neto, has given at least two messages to the same effect. On Friday (13), he said that for the agency to work with low interest rates and be effective in its actions, it is necessary to strengthen the message of budgetary credibility. On Tuesday (17), he said inflation expectations for 2022 had worsened due to the “great amount of noise” caused by government measures – the Auxílio Brasil and the precatório’s PEC.
Pedroso, from MUFG Brasil, recalls that the tax issue is more complicated to work on because it involves political negotiations, which are traditionally more complex, and the adoption of measures that may prove to be unpopular. “Then it complicates the anti-inflation scenario.”
Two indicators which reflect this greater tension in the public accounts are the exchange rate and the country risk. After being listed at R $ 4.90 at the end of June, the US currency reached R $ 5.40 on Thursday (19). And the five-year CDS, which measures the risk of investing in the country, rose from 157.5 points on June 29 to 180.8 points, around 10 a.m. on Thursday – an increase of 15% in just one month. and half.
“And there is an aggravating factor: the pressure to spend tends to increase during the election period”, specifies the economist of Tendências.