Rise in service prices gains attention but shouldn’t affect monetary easing
Carla Argenta — Foto: Claudio Belli/Valor
Brazil’s official inflation, measured by the Broad National Consumer Price Index (IPCA), was higher than analysts expected in January but did not change the scenario of prices slowing down this year.
The indicator opened 2024 with a rise of 0.42%, according to the Brazilian Institute of Geography and Statistics (IBGE). The rate exceeded the median captured by Valor Data, which had predicted a rise of 0.36%. In January 2023, the rate was 0.53%.
The increase surprised some economists, who expressed concerns about the possibility of the heated labor market pressuring inflation in the services sector. However, experts emphasize that the result will not prompt revisions to estimates that suggest the continuation of the disinflationary process. In the 12 months leading to January, the IPCA increased by 4.51%, compared to 4.62% in December.
“The magnitude of the [monthly] increase is out of line with expectations and can be alarming if you look at the composition without considering seasonality,” said Carla Argenta, chief economist at CM Capital.
She cites the food and beverage inflation of 1.38% as an example. Although this was the highest increase for this group since April 2022 (2.06%), the figure was less impacted than expected by the El Niño weather pattern. “El Niño’s effect is on a subgroup that primarily includes rice and beans, as well as fruits and vegetables. But while it has driven up food inflation at home [1.81%], it doesn’t seem to be a concern for the coming months. The effects were mostly felt last year.”
Sicredi’s chief economist, André Nunes de Nunes, reiterated that the impact of climatic events in November and December 2023 may have begun to dissipate, favoring the January 2024 result of the food group—the 1.38% increase was below the projection of 1.55%. Food at home was also below the expectations of Sicredi’s economic team, which had anticipated a rise of 1.99%.
Laiz Carvalho, an economist for Brazil at BNP Paribas, points out that the higher-than-expected IPCA in January doesn’t change the outlook. “We still think that this year’s IPCA will close at 3.5%. It will be largely driven by goods and food at home in the next few observations. We’re already seeing a reversal of these increases in other indices.”
The 0.65% drop in transportation costs also helped economists maintain the scenario. After successive rises since September 2023, the price of airline tickets fell by 15.22%. Fuel prices also decreased by 0.39% in January compared to December.
However, the main point of attention for the disinflationary process, according to Itaú Unibanco economist Luciana Rabelo, is services inflation, especially those most pressured by labor adjustments. Core services inflation rose by 0.76%.
“It’s a little worrying, especially if the services sector comes under more pressure over the year due to the heated labor market,” she said. On the other hand, she comments that the rise seen in January “was already accounted for” and does not impact the bank’s projection that the IPCA will be 3.6% at the end of 2024.
Julio Hegedus, chief economist at Mirae Asset, also points to services inflation as an element that should be closely monitored in the upcoming measurements. “We have to keep an eye on the food and drink, personal expenses, and services groups. The economy is heating up in low-income services. It’s going to be an impact factor,” he said. “There may be some demand pressure over the year, not least because the diffusion data remains high.” The diffusion index, which measures the proportion of goods and activities that have increased in price, stayed at 65.3% last month, the same as in December.
Despite the warning, there is a consensus among economists that none of the data released Thursday by the IBGE will create obstacles to the continuation of the interest rate cut cycle by the Central Bank.
“The result for underlying services in January is not something to worry about. We need to see if the movement will be repeated over the next few months,” said the chief economist at CM Capital. “At the moment, it has absolutely nothing to do with monetary policy. Inflationary inertia is proving to be increasingly smaller, and the impact on adjustments to regulated prices has also been lower. What made it different were seasonal issues that should be reversed soon,” said Ms. Argenta, who expects successive cuts of 50 basis points in the Selic policy rate until the interest rate falls to 8.5% by the end of 2024.
*Por Rafael Vazquez, Rafael Rosas, Luiz Fernando Figliagi, Ívina Garcia — São Paulo, Rio and Manaus
Source: Valor International