Institute links sharper inflationary impact on lowest income brackets to steeper increases in food prices, electricity
11/13/2024
October inflation rose for nearly all income levels in Brazil, with lower-income households seeing the highest increases, according to the Applied Economic Research Institute (IPEA). Only households with incomes above R$21,059.92 saw a slight deceleration. For very low-income households—earning less than R$2,105.99 per month—inflation climbed from 0.58% in September to 0.75% in October. Meanwhile, inflation rose from 0.55% to 0.71% for low-income households—those earning between R$2,105.99 and R$3,158.99.
The IPEA’s Income-Based Inflation Indicator, drawing on the Extended Consumer Price Index (IPCA) data from the Brazilian Institute of Geography and Statistics (IBGE), tracks inflation trends across income levels by total household income. The IPCA, Brazil’s benchmark inflation index, increased from 0.44% in September to 0.56% in October.
For households with middle-lower incomes (R$3,158.99 to R$5,264.98), inflation climbed from 0.48% in September to 0.61% in October. Middle-income households (R$5,264.98 to R$10,529.96) experienced an increase from 0.39% to 0.54%. Meanwhile, for middle-upper-income households (R$10,529.96 to R$21,059.92), inflation rose from 0.31% to 0.49%. Households earning over R$21,059.92, the only group to experience a slight deceleration, saw inflation ease to 0.27% in October from 0.33% in September.
The IPEA attributed the sharper inflationary impact on lower-income households to the steeper increases in food prices (up 1.06% according to the IPCA) and electricity costs (a 4.74% increase). Conversely, deflation in airline fares (-11.5%) and fuel (-0.17%) provided some relief for higher-income households.
“In October, although the food and beverage and housing categories were primary inflationary pressures across all income levels, the impact from these segments was proportionally stronger for lower-income households, given the larger share of their budgets allocated to these essentials,” said Maria Andreia Parente Lameiras, author of the study.
Higher inflation rates for low-income households have not been limited to October. Over the 12 months ending in October, the very low-income segment saw the highest inflation rate at 4.99%, while high-income households experienced the lowest rate at 4.44%. The average IPCA rate over the period was 4.76%, exceeding the Central Bank’s inflation target ceiling of 4.5%.
Year-to-date in 2024, low-income households have faced an inflation rate of 4.17%, compared to a lower rate of 3.2% for high-income households. By comparison, the IPCA rate over the same period stands at 3.88%.
February mid-month index saw lower increase in food; service prices concern economists
02/28/2024
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
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