Analysis: Inflation nightmare is not over

The snapshot of inflation offered by mid-month inflation index IPCA-15 in May makes it clear that Brazil is still in inflation hell, unlike what Economy Minister Paulo Guedes said last week. Inflationary pressures remain widespread, with strong increases in the prices of services, industrial products, fuels and food at home. Even with the significant deflation of electricity rates, of 14.09%, the indicator rose 0.59%, well above the 0.45% of the consensus indicated by analysts consulted by Valor Data.

The 12-month inflation rose to 12.2% in May, the highest since November 2003, compared with 12.03% in April. It is much higher than the target for this year, of 3.5%.

Almost three-fourths of the items in the IPCA-15 for May went up, as shown by the diffusion index of 74.93%. This is lower than the 78.75% reading of the previous month, but well above the 67.57% of May 2021, according to figures from MCM Consultores Associados.

Inflation is still spread throughout the economy, despite the strong cycle of hikes in the Selic. The Central Bank raised Brazil’s benchmark interest rate to 12.75% a year from 2% in March 2021. In June, the rate will probably rise another 50 basis points, and a new hike in August cannot be ruled out.

Food-at-home prices helped to slow down the IPCA-15 to 0.59% in May from 1.73% in April, but the rise is still very significant. It rose to 1.71% from 3%, still a very strong increase. The 12-month inflation in this segment rose to 16.79% from 15.4%, MCM points out.

This high, persistent inflation of food-at-home prices helps to erode the popularity of President Jair Bolsonaro, especially among the lower-income population. The IPCA-15 for May, it is worth mentioning, measures inflation between the second half of April and the first half of this month.

The picture is also concerning in services inflation, which accelerated to 1% from 0.59% between April and May. The reopening of the economy, with the end of social distancing measures due to Covid-19, contributes to the significant rise in these prices, which in 12 months jumped to 8.16% from 6.68%.

Service underlying inflation — which concentrates the items that respond most to demand — also had a significant increase. It advanced to 0.98% in May from 0.67% in April, making the 12-month inflation jump to 8.36% from 7.4%, MCM figures show. The underlying services inflation excludes the domestic services, such as courses, tourism and communications, which are less affected by the economic cycle.

The collection of bad news doesn’t end here. Industrial goods saw inflation accelerate to 1.62% from 0.87%, as the Russia-Ukraine war contributes to problems in global supply chains, a process that had begun with the pandemic.

Prices of industrial goods rose 14.41% in the 12 months to May. It is the biggest increase since MCM records began, in July 2000. Until April, the increase was 13.7%.

The average of the five cores monitored more closely by the Central Bank once again showed a difficult picture for the fight against inflation. Measures that seek to reduce or eliminate the influence of the most volatile items, these five cores rose by an average of 1.1% in May, after rising 0.87% in April, according to MCM.

As a result, the 12-month inflation went to 10.14% from 9.34%, surpassing the double-digit level. It is another sign that inflation is not concentrated in a few items.

Electricity deflation was the main factor contributing to lower inflation in May. Since mid-April the green flag was turned on, which means that there are no additional charges on the electricity bill. As a result, the item dropped 14.09% in May’s IPCA-15.

Without this effect, the indicator would have risen 1.28%, instead of 0.59%. Fuel prices, which are President Bolsonaro’s obsession, rose 2.05% in May. This is a strong increase, although lower than the 7.54% seen in April.

Fuel prices, Bolsonaro’s obsession, prompted another change in the command of Petrobras — Foto: Leo Pinheiro/Valor

The dissatisfaction with the hike of these products explains another change in the management of Petrobras —the government announced Monday night the resignation of José Mauro Coelho as CEO of the state-owned company and the appointment of Caio Mário Paes de Andrade.

The panorama for inflation, as can be seen, is still complicated. Inflation hell is not behind us. This will probably require high interest rates for a long time, which will affect economic activity in the second half of the year and next year. The return of inflation to the target path, of 3.5% in 2022 and 3.25% in 2023, will not be easy.