After tax relief, mid-month inflation index IPCA-15 lost steam in July

27/07/2022

Recent tax cuts on key items helped to bring, as expected, relief to the July inflation preview, which also saw a cooling in industrial goods prices. Inflation of services and more inertial items, however, remains pressured and worries economists.

The increase in Brazil’s mid-month inflation index IPCA-15, known as a reliable predictor for official inflation, slowed down to 0.13% in July from 0.69% in June, below the median of expectations compiled by Valor Data, of 0.16%. It was the lowest monthly variation since June 2020, when the indicator oscillated only 0.02%. In 12 months, the IPCA-15 went to 11.39% in July from 12.04% in June – compared with the top of the target range of 5%. The diffusion – proportion of items with price increases in the period – also fell, to 67.8% from 68.9%, according to Valor Data.

Most of the July IPCA-15 slowdown was explained by the 1.5% drop in regulated prices, after a 0.86% rise in June, MCM Consultores says. This reflects tax cuts on fuels, which went down 4.88%, and electricity, whose prices fell 4.61% – even more than economists expected. Among the fuels, gasoline dropped 5.01%, and ethanol, 8.16%. Diesel oil, on the other hand, rose 7.32%.

Together, fuel and electricity had a negative impact of 0.58 percentage points on the IPCA-15 in July, which means that, without this, the index would have been 0.71%. The tax cut on telecommunications has not yet been captured by the indicator and is expected to show in next readings, according to analysts. According to market projections, IPCA may fall 0.50% to 0.75% in July.

Non-regulated prices inflation, in turn, accelerated to 0.72% in July from 0.63% in June. The food and beverage group rose to 1.16% from 0.25%, with advances for both food at home (to 1.12% from 0.08%). The price of long-life milk rose 22.27% in July and was the main influence on the IPCA-15 for the month.

Although food inflation remained strong in the July forecast, economists note that the acceleration was slightly less sharp than projected and the group may have a less unfavorable outlook ahead with the cooling in commodity prices, especially grains.

Some relief in commodities — notably metals — may also help explain the deceleration in industrial goods prices, to 0.28% in July from 0.65% in June, with some reduction in the rate over 12 months (to 13.5% from 14%). “It’s still relatively timid, but it’s a sign we’ve been waiting for,” says Daniel Karp, an economist at Santander. The category also benefited from tax cuts on ethanol, but there were surprises in other more relevant industrial goods items, such as automobiles, he points out. New car inflation, for example, decelerated to 0.14% in July from 1.46% in June.

Roberto Secemski — Foto: Ana Paula Paiva/Valor

Industrial goods are also included in the core measures, those that try to minimize the effect of more volatile items. In the average of the five main cores, inflation went to 0.72% in July from 0.89% in June. In 12 months, however, it still accelerates to 10.56% from 10.43%, the highest level since 2003, says Roberto Secemski, chief economist for Brazil at Barclays. He expects a rapid deceleration of the IPCA in the second half of 2022, but not of the cores, which could complicate the Central Bank’s outlook for the interest rate, he says. “Core inflation dynamics are less susceptible to these tax changes,” he says.

Costs for more inertial and labor-intensive services also remain elevated. Inflation in the sector remained around 0.85% in July, while underlying services (more linked to the business cycle) went to 0.91% in July from 0.86%.

“These items will only react with the lag of monetary policy. It shouldn’t mean a relief in the short term, it will start to show towards the end of the year,” says Andrea Damico, the chief economist at Armor Capital. Despite the “very ugly” services inflation, the relative relief in industrial goods may make the Central Bank more comfortable to pause the cycle after the expected hike in the key interest rate Selic in August, Ms. Damico says.

*By Anaïs Fernandes, Lucianne Carneiro — São Paulo

Source: Valor International