February mid-month index saw lower increase in food; service prices concern economists

02/28/2024

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Luis Otavio Leal — Foto: Celso Doni/Valor

Brazil’s mid-month inflation index IPCA-15, known as a reliable predictor for official inflation, indicated a 0.78% increase in prices in February. Despite the rise compared to January, when the index went up 0.31%, February brought a positive surprise, according to some economists, and was driven by education, a seasonal factor linked to the beginning of the school year.

The indicator showed a slowdown in important groups, including food and beverages, but concerns about service inflation and its possible impact on the monetary easing put in place by the Central Bank remain, economists say.

February’s result fell below the median of the 29 projections made by analysts from consultancies and financial institutions interviewed by Valor Data. They had expected a 0.81% increase for the month, with estimates ranging from 0.56% to 0.90%.

Released on Tuesday (27) by the Brazilian Institute of Geography and Statistics (IBGE), the IPCA-15 saw an increase of 4.49% in 12 months until February, compared to 4.47% until January, also in a 12-month period. The number is also below the median of Valor Data estimates, of 4.52%, with a range between 4.26% and 4.61%. The Brazilian Central Bank’s inflation target for 2024 is 3%, with a margin of 1.5 percentage points downwards or upwards.

Of the nine groups surveyed, five saw an acceleration between January and February. The main increase was in education, which accelerated from 0.39% in January to 5.07% in February, marking the start of the school year with increases in tuitions. The rise in education is seasonal and was expected; it may recur in March and then disappear, said Helena Veronese, chief economist at B. Side Investimentos.

Laiz Carvalho, Brazil economist at BNP Paribas, points out that, despite the increase in education, the number was not as high as most economists anticipated. Among the prices that helped curb inflation in February, the economist cites airline tickets, which fell 10.65% in February following a 15.24% drop in January, according to IBGE. Ms. Carvalho also cites a sharper than expected slowdown in food prices. “We expect this slowdown to continue in the next readings.” BNP Paribas estimates IPCA at 3.5% in 2024.

After rising 1.53% in January, food and beverage prices reduced the pace to a 0.97% increase in February. The group accounted for 0.2 percentage point of the increase in the IPCA-15 in the month. Within the group, food at home helped curb the reading.

Higher inflation rates were seen between January and February, also in household items, transportation, health and personal care, plus communications. In the latest group, the surprise came from pay TV, which rose 4.02% in February, compared to stability in January and an increase of 2.5% in February 2023. The telephone, internet, and pay TV combo rose 3.29% in February, compared to stability in January and an increase of 1.35% in February 2023. The price of those services usually change in the months when companies make adjustment to subscriptions.

Consequently, the prices of the communications group, which had decreased by 0.03% in January, surged by 1.67% in February. This increase contributed 0.08 percentage points to the February IPCA-15. Luis Otavio Leal, chief economist at G5 Partners, remarked, “The unexpected rise in pay TV prices and the cost of telephone, internet, and TV bundles, coupled with hikes in vehicular taxes [IPVA], gasoline, and school tuition, made the beginning of the year particularly inflationary.”

After four consecutive drops, the price of gasoline rose 0.84% in February. The increase, according to Mr. Leal, reflects the states’ partial reintroduction of the Tax on Circulation of Goods and Service (ICMS) levied on the fuel.

Among the elements worth greater attention in the February IPCA-15, Ms. Veronese cites the average of core inflation, which eliminates the most sensitive and volatile components from the indicator. This average accelerated to 0.57% in February from 0.33% in January. Furthermore, service prices rose 1.13%, coming from -0.11% in January.

Part of the increase in services is explained by school tuition, said Mr. Leal of G5 Partners. “But school tuition is no excuse for the numbers of underlying services, which went from 0.68% in January to 0.65% in January. Despite the slowdown, 0.65% is a very high rate and confirms the concerns expressed last week by [Central Bank President] Roberto Campos Neto about services. The IPCA-15 did not ease these concerns.”

The underlying services show that persistent prices are still high, even with the slowdown between January and February, said Luca Mercadante, economist at Rio Bravo Investimentos. The underlying services measure only considers the most structural part of services and excludes items such as training courses, communication, and tourism. “The reminder persists, despite the positive surprise of the indicator on the margin,” he states.

For Mr. Leal, the behavior of services prices could have an impact on the interest rate cut cycle, especially from June onwards. According to the economist, that could lead to smaller interest rates cuts, of 0.25 percentage points, in comparison to the 0.5pp recent cuts. Mr. Leal projects the Selic policy interest rate at 9% per year at the end of the year.

More optimistic regarding the monetary policy, André Cordeiro, an economist at Banco Inter, points out that, although the IPCA-15 core average accelerated to 0.57%, the number was in line with expectations for February. He agrees that the main point of attention is the behavior of prices for underlying services.

“However, due to the seasonality at the beginning of the year, it is early to make any conclusions about a change in the dynamics. The scenario should not change the COPOM’s [Monetary Policy Committee] plan, which should maintain the 50-basis-point cuts in the Selic rate in the next meetings, and most of uncertainties should be about the final rate, a discussion that could gain ground only in the second half of the year,” said Mr. Cordeiro. Banco Inter projects the Selic at 8.5% at the end of the year.

Ms. Carvalho, from BNP Paribas, notes that underlying services should remain close to the current level until April’s IPCA-15, but, in her opinion, there is room for the Selic to reach 8.5% per year by the end of the year.

*Por Lucianne Carneiro, Marta Watanabe — Rio de Janeiro and São Paulo

Source: Valor International

https://valorinternational.globo.com/