With greater pressure from food in the South, benchmark index rises 0.46% in comparison to April

12/06/2024

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Marcela Rocha — Foto: Ana Paula Paiva/Valor

The Extended Consumer Price Index (IPCA), Brazil’s official inflation index, interrupted a sequence of more favorable readings and rose again above expectations in May. The indicator brings the first impacts of the floods in Rio Grande do Sul on prices, as well as reinforcing economists’ discomfort with metrics linked to the heated economy.

The IPCA rose from 0.38% in April to 0.46% in May, statistics agency IBGE reported on Tuesday. The result was above the median of 0.41% collected by Valor Data and at the ceiling of forecasts.

In 12 months, the IPCA gained momentum again, from 3.69% to 3.93%, after seven decelerating readings. The rise was already expected, but it was also stronger than the median forecast of 3.87%.

“I didn’t like what I saw and ended up changing the [IPCA] figure for the year,” said Fábio Romão, an economist at LCA Consultores, who adjusted his projection to 3.9% from 3.7% in 2024.

J.P. Morgan also revised its IPCA projections after the last reading, to 4% from 3.7% this year and to 3.7% from 3.5% in 2025. The new figures seem more consistent with “the combination of a tight labor market, rising inflation expectations, a more depreciated exchange rate, and higher food prices,” wrote economist Vinicius Moreira and the bank’s chief economist for Brazil, Cassiana Fernandez, in a report.

Five of the nine classes of expenditure registered a slowdown in inflation between April and May: food and beverages (to 0.62% from 0.70%); household goods (to -0.53% from -0.26%); clothing (to 0.50% from 0.55%); health and personal care (to 0.69% from 1.16%); and communication (to 0.14% from 0.48%). On the other hand, there was an acceleration in housing (to 0.67% from -0.01%); transportation (to 0.44% from 0.14%); personal expenses (to 0.22% from 0.10%); and education (to 0.09% from 0.05%).

With the floods in Rio Grande do Sul, inflation in the Porto Alegre metropolitan region rose to 0.87% in May from 0.64% in April. This was the highest rate among the 10 metropolitan regions and six cities monitored by the IBGE. Remote price collection (by telephone or internet) in the region rose to around 65% from the historical standard of 20% in May, according to André Almeida, the IBGE manager responsible for the IPCA.

The IPCA would have risen less, by 0.42%, if the index had been reweighted without taking the state into account, said XP economist Alexandre Maluf. Mr. Almeida explains that the institute does not estimate the IPCA without the influence of one region or another, unlike the sub-items, for which it calculates the individual influence.

The main contribution (0.57 percentage point) to inflation in Rio Grande do Sul came from food prices at home, especially fresh food, dairy products, poultry, and wheat-related products, according to Mr. Maluf. In the general IPCA, rice rose 1.47% in May, “even faster than indicated by the collections,” said Terra Investimentos in a report. In April, there was a deflation of 1.93%.

The effect of the floods in Rio Grande do Sul has started to show up in inflation measured by the IPCA, especially in foodstuffs, but as the heavy rains affected production chains in general, consequences for industrial goods or services could still arise, said Mr. Almeida.

Although it slowed down compared to April, the food and beverages group exerted the greatest upward influence on the IPCA in May, by 0.13 percentage point, or 28.2% of the increase in the index. “Despite the slowdown, the rate recorded is seasonally high,” said Mr. Romão.

XP’s Mr. Maluf says that, in general terms, the acceleration of the IPCA in May, compared to April, was due to more volatile items, such as airfare (5.91% from -12.09%), some industrial goods (0.29% from 0.21%) and monitored items (defined by contract or public agency), such as energy (0.94% from -0.46%). Also contributing were some services linked to the economic cycle, such as personal services (0.31% from 0.19%) and food away from home (0.50% from 0.39%).

On the other hand, the 0.45% rise in gasoline was lower than expected by economists. Fuels (0.45% from 1.74%) and food at home (0.66% from 0.81%), especially fresh foods (0.99% from 3.66%), moderated the rise in May, compared to April. The problem is that economists were expecting a much smaller increase for food at home—0.37% for Terra and 0.44% for XP, for example. The result was “much higher” and “with generalized upward surprises,” said Mr. Maluf.

Marcela Rocha, chief economist at Principal Claritas, highlights the 0.29% rise in industrial goods, above her expectation of 0.27%. “It’s not such a significant surprise, but in the annualized and seasonally adjusted quarterly moving average, it went from a fall of 0.1% to a rise of 0.4%, which is still super low, but it’s another indicator that the process is no longer so much about favorable news,” she said. The seasonally adjusted annualized three-month moving average is a way of smoothing out monthly movements, but still capturing the trend “at the end.” “Unlike the last two months, these underlying measures performed worse,” said Ms. Rocha.

The greater-than-expected advance in industrial goods, driven by personal hygiene products and new cars, according to Mr. Maluf, contributed to the average of the cores (measures to smooth out volatile items) monitored by the Central Bank rising 0.39% in May, from 0.26% in April, matching MCM Consultores’s expectation and above XP’s forecast (0.34%), for example. All five core inflation rates accelerated compared to April, say Victor Beyruti and Yuri Alves, economists with Guide.

Over 12 months, the average core inflation rate accelerated to 3.55% from 3.53%, according to MCM. “It showed higher inflation again for the first time since June 2022,” Mr. Beyruti and Mr. Alves wrote.

In the three-month moving average, the cores went to 3.2% in May from 3.1% in April, “deviating from the downward trend seen in previous months,” said Mr. Maluf.

Services inflation accelerated to 0.40% in May from 0.05% in April, largely due to the rise in airfares, the first in the year. More relevant to economic analysis, underlying services rose from 0.33% in April to 0.41% in May, matching MCM’s forecast and above the expectations of Principal Claritas (0.32%) and XP (0.36%). The quarterly moving average rose to 5.1% from 4.9%.

“It’s still a level below that of the beginning of the year, when the services figures came in well above expectations and reached 5.6% in March, by this metric. But it shows a qualitative part of inflation that is not as favorable as had been observed and reinforces the Central Bank’s scenario of caution and concern,” said Ms. Rocha.

Labor-intensive services, another measure closely monitored by the Central Bank, slowed to 0.38% in May from 0.53% in April, “undoubtedly the only (albeit important) relief in the opening,” said the Terra team. The news, they say, would be more impressive if it happened in a context of a slowdown in the job market, which is not the case.

“In the midst of a below-equilibrium unemployment rate, accelerating wages, and a stagnating participation rate, we will need more to convince us that there is a new trend underway,” write João Maurício Rosal, Terra’s chief economist, and economists Homero Guizzo and Luís Gustavo Bettoni. On the quarterly moving average, labor-intensive services are at 6%.

The diffusion index, which measures the proportion of items rising in the basket, rose from 57% in April, to 57.3% in May, according to Valor Data. The dispersion “came in flat,” says Mr. Romão of LCA, noting that it not only exceeded that of April but was also higher than that of May last year. The same goes for underlying services. “It’s a nuisance, a red flag,” he said.

For June, inflation forecasts are around 0.3%. But economists expect food prices to rise even more, mainly because of the floods in the South region.

*Por Anaïs Fernandes, Lucianne Carneiro — São Paulo, Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/