Price’s behavior on this branch makes economists more confident in loss of steam of Brazil’s official price index despite August increase
09/14/2023
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Andréa Angelo — Foto: Carol Carquejeiro/Valor
The performance of service prices in August made economists more confident that inflation will slow down further despite the fact that Brazil’s official inflation index IPCA has risen more last month than in July. Some analysts began to see the possibility that services inflation or at least its cores, which are less volatile metrics, will end the year at 5% or below.
Services inflation was just 0.08% in August, down from 0.25% in the previous month. Core services —a category that excludes items such as airline tickets and keeps those more linked to the economic cycle and, therefore, the monetary policy— fell to 0.14% from 0.2%, according to MCM Consultores.
The 12-month services inflation slowed from 5.6% in July to 5.4% in August, the lowest result since January 2022. Core services went to 5.5 %, the lowest since November 2021, from 6.1%.
Both are still above the 4.75% inflation target ceiling for 2023. However, in the annualized and seasonally adjusted three-month moving average, a formula that smooths monthly movements but still captures the trend “at the end,” core services went to 4.1% in August from 5.3% in July, according to Santander.
“If we continue with this dynamic, it is very likely that services inflation will end the year at around 4.5%, which would already be within the target range,” said Helcio Takeda, head of economic research at Pezco. “This brings some comfort and certainty in the sense that the monetary policy action is being efficient.”
The Central Bank’s Monetary Policy Committee (Copom) signaled in the minutes of its last meeting in August that “a substantially more benign dynamic than expected in services inflation” was one of the factors that could generate the necessary confidence to allow deeper interest cuts than the current 50-basis-point pace.
“It’s difficult to quantify what a substantially more benign dynamic would be, but I would say it is much more benign in core services inflation,” AZ Quest economist Mirella Hirakawa said.
Her projection for core services inflation in 2023, which started the year at 5.6%, has been falling since July and is around 5%.
“After the August Copom meeting, projections for the 2023 IPCA have been revised by 14 basis points just because of core services. Although this didn’t change the IPCA forecast for the year, due to the upward revision in regulated prices, it is a relevant change because the composition became more benign,” said Ms. Hirakawa.
Early this year, the median projection in the Central Bank’s Focus survey with analysts for services inflation in 2023 was 5.99%. It started to hover above 6% in February, reaching 6.24% in March and returning to below 6% from June onwards. Now, it is at 5.5%.
Services inflation of around 5% in 2023 has been one of Warren Rena’s main theses for some time now, projecting an IPCA of 4.7% for the year, within the ceiling of the inflation target and below the Focus consensus of 4.9%.
“The quality of inflation in August was very good, better than we expected, but it is just as if the slowdown was being faster in the very short term. For us, the picture as a whole was already a slowdown in services in the second half of the year,” said Andréa Angelo, Warren Rena’s chief economist for inflation. According to her, the average monthly services inflation was 0.56% in the first half of the year. In the second half, it should fall to 0.29%.
The main factor that helped Warren Rena anticipate this scenario was the perception that nominal salary adjustments went to around 5% from 10% at the end of 2022. “The biggest risk, therefore, is that this readjustment accelerates until the end of the year,” said Ms. Angelo.
Even if her projection of a 5.2% services inflation in 2023 does not hold, remaining at 5.5%, for example, “it does not change much the idea of a sharp slowdown in the year,” the economist noted. In 2022, services inflation closed at almost 8%.
For Darwin Dib, an economist at Gauss Capital, 12-month inflation in core services should move to 4.9% by year-end. The metric is important, especially for the Central Bank, as it indicates the trend of services within the IPCA.
According to his calculations, in the annualized and seasonally adjusted three-month moving average, inflation in core services went to 3.96% in August from 5.25% in July. “It was an important fall. In 12 months, the downward trend should continue until the end of the year,” he said.
Itaú Unibanco, which on Wednesday revised its IPCA projection in 2023 to 4.9% from 5.1%, citing, among others, lower inflation in services, considers that services readings should reaccelerate throughout the second half amid a heated job market. “But we recognize the risk that this will not happen,” the bank said in a report signed by Mario Mesquita and his team. Disinflation, they said, has been led by tradable items, but the latest IPCA also showed relief in non-tradables.
“In an open economy, exportable and importable goods have the exchange rate as a ceiling for inflation. The part of the IPCA that cannot be imported is precisely services, and this basket is directly sensitive to aggregate demand,” said Mr. Dib. “It’s like a canary in a coal mine, a signal of whether demand is producing inflation.”
Even the disinflation of tradable goods impacts services, Ms. Angelo noted. According to her estimates, the reductions in food and food at home, for example, should help inflation in food services (restaurants, basically) to fall from a monthly average of 0.57% in the first half to 0.33% in the second. The falls in the General Price Indexes (IGPs), which anchor contracts, and in industrial producer prices should contribute to taking the average monthly rental and building maintenance inflation to 0.27% in the second semester from 0.51% in the first, and that of vehicle services (repairs, parking, painting etc.) to 0.15% from 0.50%.
*Por Anaïs Fernandes — São Paulo
Source: Valor International