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Market already projects inflation at 7.5% by year end

Patricia Pereira — Foto: Leo Pinheiro/Valor
Patricia Pereira — Foto: Leo Pinheiro/Valor

The Brazilian monetary authority has been sailing in the dark for almost two weeks without the latest editions of the Focus survey, which collects the estimates of economic agents for several key indicators in the management of the country’s monetary policy, such as inflation (IPCA), activity (GDP), and interest rates (Selic). It does not mean, however, that market projections are not moving. Since the last Focus survey, released on March 28 and interrupted by a civil servants strike, the official inflation for March has frightened, the president of the Central Bank has reacted and the statistics agency IBGE has released the performance of the main sectors of the economy in February.

A survey carried out Wednesday by Valor with 74 financial and consulting firms shows a median projection for the variation of the country’s benchmark inflation index IPCA of 7.5% in 2022 and 4% in 2023. The lowest estimates are 6.5% for this year and 3.4% for next year, while the highest are 8.6% and 6%, respectively.

In the latest Central Bank bulletin, whose responses were collected on March 25, the median expectation for the IPCA was 6.9% in 2022 and 3.8% in 2023. The targets are 3.5% and 3.25%, respectively, with a tolerance of up to 5% and 4.75%, in that order. Valor’s survey is not directly comparable to Focus, which registers around 130 to 140 responses, but it helps to give a sense of direction.

“What led many people to revise [the inflation projection] recently was the IPCA of March, the biggest surprise in 20 years,” said João Fernandes, an economist at Quantitas, in reference to the monthly high of 1.62%. The median market expectation was 1.32%, according to Valor Data. “Before that, the revisions were just approaching the median, as some firms that had lower numbers raised their estimates. The data changed this dynamic. They all started to revise projections upwards”, Mr. Fernandes said. Quantitas forecasts inflation of 8.3% in 2022 and 4.3% in 2023.

Goods in general are to blame for current inflation, including the durable ones, like vehicles and electronics, and semi-durables, such as cleaning products, cosmetics and clothing, Mr. Fernandes said. The story, he says, is well known: the global lack of inputs, in the context of the pandemic, was in the process of normalizing, but ended up aggravated again by the war in Ukraine and the outbreak of Covid in China.

“Our biggest concern is basically with the inflation scenario. We experienced last year specific shocks that turned into generalized price hikes, and we had even more shocks on top of this already concerning picture. This is why we think that the IPCA will close the year at 8%, because inflationary pressures are very disseminated,” said Roberto Padovani, the chief economist at Banco BV.

These shocks will be more persistent than predicted, due for example to the secondary effects of inflation on fuels and other commodities, said Gustavo Arruda, head of research for Latin America at BNP Paribas. “When we do the math, we see that those risks are undersized.” He projects the IPCA at 8.5% this year and 4.5% next year.

In Brazil, Mr. Fernandes added, there is still a resilient labor market. “Even though we understand that a higher Selic will ease the pressure at some point, we see now labor costs gaining traction amid higher demand for in-person services. We saw the PMS [Monthly Services Survey] slowing down last month, but I think there will still be strong readings for three or four months.”

IBGE said this week that services fell 0.2% in February compared to January, seasonally adjusted, while the expanded retail market — which includes vehicles and construction materials and is what counts the most for the GDP — advanced 2%. Earlier this month, the institute said that industrial production had grown 0.7% in February.

Based on these indicators, the Central Bank would present Thursday its February Economic Activity Index (IBC-Br), which offers the market a barometer of the month’s activity, but the release is not expected to happen because of the strike. Valor Data’s survey with 27 analysts indicates a median increase of 0.4%.

Valor’s survey captured Wednesday a median projection for the GDP of 0.5% in 2022 and 1.2% in 2023, virtually the same as the Focus of April 28 (0.5% and 1.3%, respectively).

Another problem for inflation, according to economists, is the perception that inflation expectations are unanchored. “That leads to more persistent inflation. Even in sectors of the economy that are not directly affected by the conflict, just the perception that the cost of living is higher allows agents to pass on more price. Although we are a little blind because there has been no Focus survey, the dynamics of the daily price surveys show that inflation is not slowing down,” said Mr. Arruda, with BNP Paribas.

When “the regime in people’s minds” and the economy takes longer to deflate, the Central Bank “must try to ease the pass-through,” said Fernando Fenolio, the chief economist at WHG. The president of the monetary authority, Roberto Campos Neto, drew attention earlier this week when he acknowledged that the result of the IPCA in March was a surprise and said that “our inflation is very high.”

“The Selic rate today is our point of greatest uncertainty. We recently brought it to 12.75%, despite the math showing that it would need 13.5%, because the monetary authority made a point of affirming that 12.75% was enough. After the IPCA of March, Mr. Campos Neto opened the possibility of a stricter conduct, but we are still waiting for a more intense communication,” said Étore Sanchez, the chief economist at Ativa.

The survey for the Selic rate carried out by Valor is directly comparable to another one made by the newspaper in mid-March and showed no change in the projection of a median Selic rate of 13.25% at the end of the high cycle this year.

“The bar was high for the Selic to go above 12.75%, but it was only because of the Central Bank’s signaling, as on the inflation side the dynamics showed that prices were going to continue rising fast,” said Patricia Pereira, the chief fixed income strategist at MAG Investimentos. She revised her forecast for the Selic to 13.75% from 13.25% after Mr. Campos Neto’s remarks.

Some factors can help the Central Bank in its task. If the exchange rate remains below R$5 to the dollar, for example, this may translate into lower industrial prices, and the activity, as it gets weaker, would also contribute to a lower pass-through capacity, points Mr. Fenolio, with WHG.

The median of the exchange rate projections of the last Focus survey was R$5.25 at the end of 2022, while the one collected Wednesday by Valor indicates exactly R$5. Even so, it would be a more depreciated exchange rate than the current levels. “There doesn’t seem to be much more room for an appreciation of the real ahead. The United States will start to tighten interest rates, there is domestic uncertainty and commodities have already risen a lot at the peak,” said Ms. Pereira, with MAG.

Source: Valor International

https://valorinternational.globo.com

Inflation spike annuls consumption, income stimuli

Global inflation and Nepal

The inflation surge is expected to virtually annul the government’s attempt to offer support to household income and, consequently, to consumer spending, with fiscal stimulus measures such as the release of money from the Workers’ Severance Fund (FGTS) from this month on, a study by Santander shows.

Economists Gabriel Couto and Ítalo Franca estimate that withdrawals – up to R$1,000 per worker, which add up to R$25 billion to R$30 billion – will add 0.6 percentage point this year to the country’s extended real total wage bill – which includes wages, social security benefits and federal transfers. Even so, the growth projection for total wage bill has practically not changed between the October report and the one to be published Wednesday by the bank: it has gone to 3.2% from 3.3%, after plummeting 8% in 2021.

This occurs because the increase in the inflation projection to 7.9% from 6% annulled the expected growth with the withdrawals, according to Messrs. Souto and Franca. The higher inflation, they explain, reduces the real growth of the average income. At the same time that the employed population grows, the real income from work reached all-time lows, eroded by the persistent inflationary shock, they point out, in addition to lower entry-level wages for those returning to the labor market, Mr. Couto points out.

“We’ve had considerable inflationary surprises in the last few months and this directly impacts real income. The big point we can take from this update is that, even with the release of funds from the FGTS that we now include, the worsening of the inflationary picture has eroded this income,” the economist said.

Although fiscal stimuli play an important role, they say, the impact of inflation on the economy’s total income is greater. For example: the projected growth of 3.2% for the expanded wage bill this year contemplates fiscal stimuli, withdrawals from the FGTS and the IPCA (Brazil’s official inflation index) at 7.9%. In this case, the real gain in average income is 0.4%. “It’s already quite modest, especially when we look at what happened to the average income last year, when it dropped more than 4%,” Mr. Couto recalls.

If only the inflation forecast goes to 9%, the real average income would fall, reducing the growth of the expanded total wage bill to 2.5%. If the IPCA is maintained at 7.9%, but the scenario no longer contemplates withdrawals from the FGTS, there would also be a drop in the advance of the extended wage bill, but the loss would be a little smaller, to a growth of 2.8%.

The growth of the expanded total wage bill this year comes from the recovery of the labor market, the expansion of cash transfers programs Bolsa Família/Auxílio Brasil (to R$89 billion from R$35 billion) and the adjustment of social-security benefits for inflation, points out the report.

Mr. Franca stressed the mismatched effect of higher inflation on the extended total wage bill. “It ends up decreasing the value for the year. The higher [the price index] is, the more you deflate by a higher number, the more it erodes this income that is already given – the minimum wage and the benefit amounts are fixed. It ends up leading to a higher correction value for the minimum wage next year, but this increase will only be observed if inflation meets the target. We ended up losing a little of the gain [in the extended salary mass] this year because we are revising inflation upwards.”

In relation to 2023 and 2024, Santander’s estimates for the growth of the wage bill are lower, with increases of 1% and 1.8%, respectively, considering the inflation measured by the IPCA at 4% next year and 3% in 2023.

In Santander’s high inflation scenario (5% in 2023 and 4% in 2024), the extended total real wage bill would fall 1% next year and grow only 0.4% in 2024.

If Santander’s baseline scenario predictions materialize, the real total wage bill will reach 2019 levels only in 2024. “As the people who are entering the labor market take a while to recover the pre-pandemic wage levels and inflation continues at slightly more uncomfortable levels, we imagine that this recovery in average income will be a little slower, even though we have already recovered the pre-pandemic occupation levels,” Mr. Couto said.

According to economists, the projections for total income are consistent with the outlook for an economic activity in which household consumption advances 0.8% in 2022, remains stable in 2023 and grows 1.5% in 2024.

Santander estimates that the long-term elasticity between the real total wage bill and household consumption is close to 1.05 – that is, each 1% increase in the total wage bill raises consumption by 1.05%. During the pandemic, economists note, this elasticity even jumped to 1.5, which probably helped activity recover in 2021. For the coming periods, however, it is expected to return to levels closer to their pre-pandemic values (around 1), they say.

“Vaccination was crucial in recovering domestic activity and increasing social mobility; now, we believe the focus will be on inflation convergence,” the report points out.

Source: Valor International

https://valorinternational.globo.com

Analysis: Central Bank seeks to contain market reaction to inflation

Roberto Campos Neto — Foto: Reprodução/YouTube

Central Bank President Roberto Campos Neto downplayed concerns about the sharp acceleration in March inflation, seeking to contain the market’s reaction to the latest reading of the IPCA, Brazil’s official inflation index, unveiled Friday. Inflation was up 1.62% in the month, above the median of 41 projections compiled by Valor Data, of 1.32%.

The financial market followed Monday morning a live-streamed event with Mr. Campos Neto, held by Arko Advice and the Traders Club (TC), in search of signs about a possible extension of the monetary tightening cycle after the news on inflation.

Mr. Campos Neto said that the reading represents a “small” surprise, before explaining that the Central Bank needs to better analyze the data before unveiling its findings.

The central banker had been saying he saw a final interest rate hike in May, to 12.75% per year from the current 11.75%, as the more likely outcome. He did not repeat this message on Monday. But this seemingly does not mean he will tighten further, as he had already failed to repeat the signal in a statement at another event last Thursday, before the latest figure for the IPCA was released.

Mr. Campos Neto tried to soften the bad news in several moments. He said the monetary authority had already been calling attention to the fact that when oil company Petrobras raises fuel prices, the increases hit the pumps more quickly, although in the end the pass-through occurred at an even faster speed. According to him, this faster pass-through in a month means that, in the subsequent period, there will be compensation.

Mr. Campos Neto also said that it wasn’t only in Brazil that there were surprises in the most recent inflation reading, as several other countries faced the same situation. He highlighted the role that the recent appreciation of the real against the dollar may have in avoiding a strong impact of the rise in commodity prices in inflation.

According to him, the stronger real is not completely priced by the financial market, since many analysts are still working with a foreign exchange rate between R$5.25 and R$5.35 to the dollar. “When I look at the estimates I get from the inflation market, some people have already fully considered the [new] exchange rate, while others haven’t yet,” he said.

In other words, Mr. Campos Neto highlighted the exchange rate as a positive factor that could affect the market’s inflation expectations, at a moment when economic analysts are raising their projections in response to faster inflation.

And Mr. Campos Neto also said he was comfortable with the appreciation of the real, saying that it doesn’t demand interventions from the Central Bank. He signaled that he might start selling dollars on the market if there are impacts from the withdrawal of stimulus in the United States.

Mr. Campos Neto was asked if there was any special concern with services inflation. He answered that these prices had been showing the expected behavior during the reopening of the economy. But industrial goods prices failed to drop as expected. “[Service] inflation somewhat reacted in the way we expected,” Mr. Campos Neto said.

Some negative things mentioned by Mr. Campos Neto deserve attention. For example, he cited rising wages for the first time and spoke of high core inflation and the prices of clothing and food away from home, which showed a “surprising increase.”

But overall, he was quite careful to avoid definitive conclusions, claiming more than once that one must carefully study the data. He also recalled that the interest rate hikes made since last year have not yet had time to be seen in the economy.

In other words, Mr. Campos Neto’s entire speech was designed to acknowledge that the IPCA was higher than expected, but that it is undecided whether an additional monetary policy response will be necessary.

Source: Valor International

https://valorinternational.globo.com

As inflation grows, high-income Brazilians sustain consumption

Here's how inflation works and what can be done about rising prices | CBC  News

Friday’s disclosure of Brazil’s benchmark inflation index IPCA for March exceeding the ceiling of the projections enhances the signs of a persistent rise in prices, which should require higher levels of interest rates, with a direct effect on the population’s purchasing power. This environment brings more uncertainties to a consumption scenario that is already more unequal and complex for business.

On Friday afternoon, banks and economists began to revise upward projections for inflation and the Selic policy interest rate in 2022 and shares of highly credit-dependent chains closed in sharp decline in the trading session.

Two recently concluded surveys, from research companies GfK Brasil and NielsenIQ, obtained by Valor, which cross-reference income and purchase profile, show the effects of the crisis at the client end. There is a decrease in the participation of the poorest in trade sales, and a greater dependence of industries and retailers on the demand of the richest – a clear sign of increased social inequality. In addition, the percentage of people afraid to spend, even with money in their pockets, is at 45%, almost half of the surveyed sample, and above the global average.

“There is an effect of the current scenario, and also remnants of the previous crises, of 2015 and 2016, which add to the pandemic,” says Jonathas Rosa, retail executive at NielsenIQ.

According to the GfK survey, the upper and upper-middle classes reached a 56% share in the sale of durable goods (TVs, refrigerators, washing machines) from October to December 2021, the highest rate in 12 quarters (three years), the survey’s analysis period. From January to March 2020, with the health crisis in its initial phase, these classes accounted for 51% of purchases and, a year earlier, for 50%.

Those with lower income (low and lower middle classes) participated with 39% of sales at the end of 2021, when the Selic and inflation already weighed on credit costs and purchases, versus 47% at the end of 2020, the period when the emergency aid was paid. According to the survey criteria, low income means families with a monthly income (before taxes) of less than R$1,600; lower middle class, from R$1,601 to R$3,000; upper middle class, from R$3,001 to R$5,200, and in the high class, above R$5,201.

The survey concluded that the “safe” income of employed people (part of them, classes A and B) and pensioners are sustaining the consumption of durable goods. Employed workers accounted for 49% of purchases in the fourth quarter, the highest rate since the beginning of 2020. The unemployed participated with 14%. Between October and December 2020, with emergency aid being distributed, employed people made 44% of purchases, and the unemployed accounted for 18%. Between 10,500 and 11,500 people were surveyed each quarter in questionnaires covering in-store and digital sales.

“There are resources left in the higher income population, but the lower class is in need of more stimuli, which take some time to be reflected in consumption,” says Felipe Mendes, head of GfK Brazil. In the second quarter, he understands that poorer workers will still bear stronger pressure on their expenses, “but it is possible that the increase in the minimum wage, high percentages of collective bargaining and the return of the [cash-transfer program] Auxílio Brasil, in the role of demand stimulators, will improve the situation of this group after May or June.” There will also be the impact of the drop in energy prices, with the change of the flags, and possible retreats in the unemployment rate, but he reminds that there will still be the after-effect of the rising interest rates since 2021. “There are negative and positive factors, and we will have to follow their effects, but it will be a difficult balance.”

Mr. Mendes highlights that when the crisis started, the poorest bought more “survival items”, growing their participation in microwave or stove sales. “With Auxílio Brasil, they took the opportunity to equip their homes, and their participation grew in items in general, until 2021 comes and they lose their position in most products.” The upper class, on the other hand, reduced its participation in sales for a brief period in 2020, but regained its position in total, and today there is a dispute for its income among segments, such as tourism and services.

Data from the Nielsen survey show a higher rate in Brazil (45%), compared to the rest of the world (at 38%), of people who, despite not having been affected by the crisis after 2020, do not feel so confident to buy. “Those people need to be convinced to spend,” says the 64-page study. Those who saved money in the crisis and are even more comfortable with their situation (called “small but powerful group”) are 6% in Brazil, the same global average, by the survey concluded in March, in 16 countries.

There are still the “strugglers”, in financial difficulty until now, (22% in the country and 23% in the world), the “recovered”, who have experienced losses, but have already recovered (19% and 21%, respectively), and the “unchanged”, who have not felt anything (8% and 12%, respectively). According to Mr. Rosa, with NielsenIQ, about 80% of the population is in the range of those most susceptible to the crisis (struggling, cautious and recovered).

“We have been following these groups since 2016 and 2017, when inflation and unemployment also exploded. And these groups have experienced many cyclical processes, many ups and downs, so they entered the pandemic already very weakened,” he says.

As the consumer market is strengthened by the expansion of scale and production, the loss of income in the lower classes compromises investment plans and job creation. This is also why this volatility worries the sector. “The tight retail margin makes it depend on a lot of volume to dilute costs, and if the base starts to flatten, it is a warning sign”, says economist Fabio Bentes, with the National Confederation of Commerce of Goods, Services and Tourism (CNC).

Within this logic, José Jorge do Nascimento Jr., president of Eletros, the electronics industry association, says that part of the sector that sells high value-added items, focused on classes with higher purchasing power, is “well satisfied”. “But in general terms, the market has been bad since October. There are no really relevant new investments and there is also the announcement [in March] of the 10% drop in the import tax for some goods, which brings insecurity to companies,” he says.

“The income of the great mass of consumers is crushed. For example, in 2020 and part of 2021 we sold many robot vacuum cleaners, which cost R$2,000. We sell a certain number of them, but ten times more of conventional vacuum cleaners, which cost R$300, R$400. It is very good to sell the robot, but it is not the one that really generates tax collection and volume,” he adds.

For Mr. Bentes, with CNC, the announcement of an IPCA of 1.62% in March (the highest for the month since 1994), above the ceiling of the projections, adds risk to the scenario in the short term – until December, the association projected a rise of 0.9% in trade sales in 2022, and this year revised it to 0.5% (discounting inflation). However, it says it is necessary to consider “compensatory factors” throughout 2022, with a greater effect in the second half of the year.

“A real appreciated against the dollar helps today, with stocks entering the stores less expensive, and there is still a ‘gap’ between wholesale and retail prices, because the chains have not been passing on all the pressure that comes from the factory floor,” he says. “The wholesale inflation, which has already been 25% in 12 months, until December, in total until February is 20%, and we expect that the retail market will still pass on half of this, due to the macro scenario that is still difficult.”

On Friday, Itaú revised the projection for the IPCA in 2022 to 7.5% from 6.5% and expects the monetary authority to continue raising the Selic to up to 13.75% per year. Also on Friday, Santander Asset raised its IPCA estimate to 7% from 6.5% and sees interest rates at 13.75% for the year – 50 basis points above the previous analysis.

In Friday’s trading session, the shares of Via, Americanas and Magazine Luiza, with business more linked to credit, fell 7.93%, 7.72%, 6.55%, respectively. In the view of the head of equity research at Itaú BBA, Thiago Macruz, this decline needs to be analyzed from the standpoint of the cost of capital, pressured in a scenario of persistent inflation and high interest rates over a longer period. “Retailers more exposed to the C class even tend to have a better second half, but partly because of the comparison base of this easier period over 2021,” he says.

Source: Valor International

https://valorinternational.globo.com

Brazil’s inflation, growth may be pressured by Ukraine conflict

Boletim Focus: Mercado eleva previsões para inflação e economia em 2019

The war between Russia and Ukraine may put even more pressure on Brazilian inflation in the short time this year, experts say. In practice, the conflict, close to oil and grain-producing regions, will raise commodity prices and Brazil will be somewhat impacted. Analysts say oil giant Petrobras could raise gasoline and diesel prices and warn about more expensive products, especially those made of grains like wheat and oats, in the wholesale and retail markets.

“It is indeed something that will affect inflation, not only in Brazil but on a global scale,” said Étore Sanchez, chief economist at Ativa Investimentos, on the beginning of the Russian invasion of Ukrainian territory. He warned that, in the case of gasoline, which has a great weight in the formation of Brazil’s benchmark inflation index IPCA, calculated by the Brazilian Institute of Geography and Statistics (IBGE), this product already operates with a price that has “a 20% lag” in relation to the international price, according to his calculations. This was before the conflict in Ukraine, which started at dawn on Thursday.

The conflict may contaminate Brazil through two channels, said Alessandra Ribeiro, a partner and head of macroeconomics and sector analysis at Tendências Consultoria. One is the financial one, due to capital flight from emerging economies to less risky assets. The other is the “real economy,” with the increase in commodity prices reducing consumption in global terms.

According to calculations by Rafaela Vitória, chief economist at Banco Inter, the gasoline price lag has been between 10% and 12% — and has been “admirably” controlled by Petrobras. But the specialist admitted that the situation has changed completely with the entry of Russian troops into Ukraine. This is because the situation leads to an escalation in the price of the Brent-type oil barrel, she noted. “We may have imminent readjustment of fuels [in Brazil],” she admitted.

André Braz, an economist at Fundação Getulio Vargas (FGV) and responsible for inflation calculations in the General Price Indexes (IGPs) family, agrees. “With this situation, oil has already reached the $100/barrel threshold,” he warned. “It’s a situation that could get worse as this conflict evolves and perhaps compromise oil production, oil extraction. This will still involve other countries and it is just beginning,” he warned.

Mr. Braz commented that oil was already rising before the conflict, but the recent appreciation of the real against the dollar helped to offset the impact, in Brazil, of the rising prices of dollarized commodities. “Brazil is being visited by a large speculative volume, the smart money,” he pointed out, explaining that, with more dollar inflows into the country, the foreign exchange rate dropped: “It is a volatile money, but it helps to reduce the impact of dollarized commodities. So, if we had not accumulated a positive variation of the real, it would be a harder impact,” he said.

The FGV expert noted, however, that although a recent appreciation of around 10% of the real against the dollar softens some impacts, it “softens but does not prevent” the inflationary impact of high commodity prices in Brazil. For the specialist, it is possible that there will be news of fuel hikes in the coming days, such as gasoline and diesel.

Besides oil, another warning from the specialist is the probable increase in the price of grains and their products in Brazil. He recalled that Russia is a strong producer of wheat, and Brazil is not self-sufficient, which is important both in the calculation of wholesale and retail inflation, he noted. “If wheat flour goes up, it contaminates a long chain [in retail] that goes to wheat flour, pasta, bread, crackers, noodles, a series of component items of the basic food basket,” he listed. “We don’t reap anything positive from a war, and the effects of it will certainly get to inflation,” he said.

Rodolfo Margato, an economist at XP, also sees “an upward pressure bias” on oil products and grains produced in conflict areas, such as wheat, rye and oats. But he pointed out that it is impossible to project impacts in percentage points in inflationary indicators at the beginning of the conflict in the region.

But, in the case of commodities, he said that before the war between Russia and Ukraine the world was already facing reduced stocks of commodities and, in the case of Brazil, domestic inflation in 12 months already was in double-digit levels. This week, before the Russian invasion of the neighboring country, the IPCA-15 for February, a preview of the IPCA, the official inflation indicator, already saw a 12-month increase of 10.76%. “The scenario is of higher global uncertainty, especially commodity prices rising,” he acknowledged, adding that, in general, the conflict in Ukraine makes it more difficult to fight inflation in Brazil.

(Anaïs Fernandes, Marina Falcão and Marta Watanabe contributed to this story.)

Source: Valor International

https://valorinternational.globo.com

Brazil’s inflation, growth may be pressured by Ukraine conflict

Rafaela Vitória — Foto: Divulgação
Rafaela Vitória — Foto: Divulgação

The war between Russia and Ukraine may put even more pressure on Brazilian inflation in the short time this year, experts say. In practice, the conflict, close to oil and grain-producing regions, will raise commodity prices and Brazil will be somewhat impacted. Analysts say oil giant Petrobras could raise gasoline and diesel prices and warn about more expensive products, especially those made of grains like wheat and oats, in the wholesale and retail markets.

“It is indeed something that will affect inflation, not only in Brazil but on a global scale,” said Étore Sanchez, chief economist at Ativa Investimentos, on the beginning of the Russian invasion of Ukrainian territory. He warned that, in the case of gasoline, which has a great weight in the formation of Brazil’s benchmark inflation index IPCA, calculated by the Brazilian Institute of Geography and Statistics (IBGE), this product already operates with a price that has “a 20% lag” in relation to the international price, according to his calculations. This was before the conflict in Ukraine, which started at dawn on Thursday.

The conflict may contaminate Brazil through two channels, said Alessandra Ribeiro, a partner and head of macroeconomics and sector analysis at Tendências Consultoria. One is the financial one, due to capital flight from emerging economies to less risky assets. The other is the “real economy,” with the increase in commodity prices reducing consumption in global terms.

According to calculations by Rafaela Vitória, chief economist at Banco Inter, the gasoline price lag has been between 10% and 12% — and has been “admirably” controlled by Petrobras. But the specialist admitted that the situation has changed completely with the entry of Russian troops into Ukraine. This is because the situation leads to an escalation in the price of the Brent-type oil barrel, she noted. “We may have imminent readjustment of fuels [in Brazil],” she admitted.

André Braz, an economist at Fundação Getulio Vargas (FGV) and responsible for inflation calculations in the General Price Indexes (IGPs) family, agrees. “With this situation, oil has already reached the $100/barrel threshold,” he warned. “It’s a situation that could get worse as this conflict evolves and perhaps compromise oil production, oil extraction. This will still involve other countries and it is just beginning,” he warned.

Mr. Braz commented that oil was already rising before the conflict, but the recent appreciation of the real against the dollar helped to offset the impact, in Brazil, of the rising prices of dollarized commodities. “Brazil is being visited by a large speculative volume, the smart money,” he pointed out, explaining that, with more dollar inflows into the country, the foreign exchange rate dropped: “It is a volatile money, but it helps to reduce the impact of dollarized commodities. So, if we had not accumulated a positive variation of the real, it would be a harder impact,” he said.

The FGV expert noted, however, that although a recent appreciation of around 10% of the real against the dollar softens some impacts, it “softens but does not prevent” the inflationary impact of high commodity prices in Brazil. For the specialist, it is possible that there will be news of fuel hikes in the coming days, such as gasoline and diesel.

Besides oil, another warning from the specialist is the probable increase in the price of grains and their products in Brazil. He recalled that Russia is a strong producer of wheat, and Brazil is not self-sufficient, which is important both in the calculation of wholesale and retail inflation, he noted. “If wheat flour goes up, it contaminates a long chain [in retail] that goes to wheat flour, pasta, bread, crackers, noodles, a series of component items of the basic food basket,” he listed. “We don’t reap anything positive from a war, and the effects of it will certainly get to inflation,” he said.

Rodolfo Margato, an economist at XP, also sees “an upward pressure bias” on oil products and grains produced in conflict areas, such as wheat, rye and oats. But he pointed out that it is impossible to project impacts in percentage points in inflationary indicators at the beginning of the conflict in the region.

But, in the case of commodities, he said that before the war between Russia and Ukraine the world was already facing reduced stocks of commodities and, in the case of Brazil, domestic inflation in 12 months already was in double-digit levels. This week, before the Russian invasion of the neighboring country, the IPCA-15 for February, a preview of the IPCA, the official inflation indicator, already saw a 12-month increase of 10.76%. “The scenario is of higher global uncertainty, especially commodity prices rising,” he acknowledged, adding that, in general, the conflict in Ukraine makes it more difficult to fight inflation in Brazil.

(Anaïs Fernandes, Marina Falcão and Marta Watanabe contributed to this story.)

Source: Valor International

https://valorinternational.globo.com

Factory-gate inflation hit a record high of 28.39% in 2021

The so-called factory-gate inflation in the country, without taxes and freight, hit a record for the second consecutive year. This is what the Brazilian Institute of Geography and Statistics (IBGE) reported yesterday when announcing the Producer Price Index (IPP), the official indicator that measures price evolution in this segment.

According to the institute, the IPP fell 0.12% in December, down from 1.46% in November, favored by price drops in the mineral extraction industry, especially iron ore, in that month. However, the negative rate in the monthly evolution was not enough to prevent a record high of 28.39% in the annual IPP for 2021 – the most intense in the historical series that began in 2014, and well above 2020 (19.40%).

Several factors led to the result, according to the manager of analysis and methodology of the IBGE’s Coordination of Industry, Alexandre Brandão. Besides the appreciated dollar, he recalled, which makes imported inputs for production more expensive, raw materials commodities also became more expensive in 2021 due to a higher demand than supply. This was the case of iron ore, crude oil, chemicals, and food. All those factors in a pandemic scenario led to the disorganization of the industry’s global input chain, not yet completely fixed, observed the specialist.

When questioned about the possibility of a continued high in the indicator this year, the manager recalled that the IBGE does not make forecasts. However, he admitted that most of the reasons that led to the record high IPP in 2021 were not completely resolved at the beginning of this year. “The environment hasn’t changed much from the end of the year to here,” he acknowledged. “But we have to wait and see what will happen [with the IPP].”

When talking about the trajectory of the indicator, Mr. Brandão recalled that the IPP for the industry is formed by two indices: the transformation industry and the extractive industry. The transformation industry inflation rate was 0.63% in December, compared to 1.89% in November, while the IPP for the extractive industry was down 12.77% in December, after a retreat of 5.21% in November.

With the December performances, the factory-gate inflation for the transformation industry closed in 2021 with an increase of 29.24%, compared to a high of 18.18% in 2020. The IPP for the extractive industry, on the other hand, rose 13.83% in 2021. In 2020, the increase in the extractive industry was 45.35%.

Although both the extractive and transformation industries have contributed to the increase of the IPP in 2021, the latter had a larger impact in the formation of the spike of prices calculated by the indicator, said Mr. Brandão. He informed that the annual factory-gate inflation of the transformation industry also hit a record last year. “The prices of the transformation industry represent around 95.12% of the total indicator,” he recalled, adding that the strong weight, along with expressive high, drove the record IPP.

Among the segments that rose the most in price last year, the specialist cited oil refining and biofuels. “This segment had a price rise of 69.72% last year,” he added. The specialist commented that the area was strongly influenced by upward fluctuations in the price of a barrel of oil – which makes related derivatives more expensive, the analyst pointed out.

In practice, noted the specialist, it was not most segments, but those of greatest weight in the calculation of the IPP, which had a significant increase last year. In 2021, eight out of 24 activities of the extractive and transformation industries closed higher than the previous year. Besides oil refining, other highlights cited by Mr. Brandão were the price increases last year in food products (29.24%), other chemicals (64.09%), and metallurgy (41.79%). “The increases in these four [segments] explain most of the rise in the year [of the IPP],” he summarized.

Source: Valor International

https://valorinternational.globo.com

World’s largest rate hike casts doubt on Central Bank’s power to fight inflation

Inflation, hyperinflation and deflation? | Tendercapital

Brazil was the country that raised interest rates the most in 2021 and yet boasts one of the highest consumer inflation expectations for this year when compared to its peers. For some analysts, the figures show that inflation in Brazil has reacted little to increases in the Selic policy interest rate. This theory diverges from what members of the Central Bank’s Monetary Policy Committee (Copom) and other economists argue. They say monetary policy has gained “power” in recent years, as inflation is reacting more than before to changes in the basic interest rate. The discussion may gain substance among economists in 2022, in an environment of still pressured inflation and a presidential election.

A survey by Emilio Chernavsky, doctor of Economics from the University of São Paulo, shows, for example, that the variation in interest rates in Brazil was much larger than in other countries. According to data from the Bank for International Settlements, the 7.25 percentage points hike in the Selic last year puts Brazil firmly in the lead of the ranking of countries with the biggest increases in the basic interest rate. In second place comes Russia, with 3.25 points. In the case of consumer inflation expectations for this year, Brazil has the fifth highest estimate, of 4%, behind Turkey (14.5%), India (4.9%), South Africa (4.5%) and Russia (4.3%), according to the International Monetary Fund.

“Monetary policy is very little effective in Brazil,” Mr. Chernavsky said. “We were by far the country that raised the basic interest rate the most, and this did not lead us to comfortable inflation, despite the fact that our economy is already stagnant,” he added, pointing out that the cycle of hikes has not yet ended. The median projection of Focus, Central Bank’s weekly survey with economists, for the basic interest rate, currently at 9.25% a year, is 11.75% by the end of 2022.

The economist cites some reasons why he considers that monetary policy is not very effective in Brazil. One is the fact that commodities and regulated prices have a large weight in the Extended Consumer Price Index (IPCA), Brazil’s official inflation. In practice, this means that changes in the basic interest rate affect only 70% of the IPCA, according to him. Another reason is the high volatility of the real, which in many cases generates a “precautionary cost pass-through.”

He also highlights the role of “systematically large” spreads in Brazil, or the difference between the rates charged for loans and for raising funds. Mr. Chernavsky cited credit cards as an example, “one of the main ways of financing consumer spending” in the country.

“In the case of a 7-percentage point increase in the Selic, even if this is passed on in full, the final rate will rise, say, to 307% per year from 300%,” he said. “The impact on the loan installment will be negligible.”

On the other hand, increases in the Selic rate of the same magnitude increase costs for companies by putting greater pressure on the cost of working capital lines of credit, whose annual rates “are at 20%, 30%.”

“So the thing is: the credit channel works very badly,” he said. “Selic hikes hardly impact demand, but increase costs for companies. So the net effect on inflation ends up being small.”

Given these distortions, Mr. Chernavsky is in favor of using other instruments besides the basic interest rate to keep inflation in check. Among them are reserve requirements (collected by the Central Bank through rates levied on funds raised by financial firms), a Tax on Financial Transactions (IOF) and a “fiscal fund” to help give more stability to fuel prices.

The Central Bank has been defending the thesis of increased monetary policy power since 2019. In its quarterly inflation report for the first quarter of 2020, the monetary authority discussed the reasons why it considered that the power of the interest rate had increased. More recently, at the end of last year, the then director of economic policy, Fabio Kanczuk, reinforced this idea, citing the approval of the Long-Term Rate (TLP) in 2017 and the reduced role of the Brazilian Development Bank (BNDES) as reasons why inflation is reacting more to Selic hikes.

For Zeina Latif, an economic adviser at Gibraltar, it is not possible to say that the cycle of basic rate hikes last year and the inflation projections for this year show a loss of power of monetary policy.

“Any way to measure this now would be very limited because of natural lags in monetary policy,” she said. In the current cycle, the Central Bank first raised the basic interest rate in March last year, to 2.75% a year from 2%.

“We are now starting to feel some first signs of the hikes on economic activity,” she said. “Only then come the impacts on inflation. Definitely, there wasn’t time yet to feel the impacts on inflation.”

Ms. Latif says that monetary policy has gained power since the Rousseff administration, but believes that part of this gain was reversed in the last two years, when a “fiscal deterioration” began. The strongest sign, according to her, are the higher projections for the neutral interest rate, the one that neither accelerates nor decelerates inflation. In December, the Central Bank itself raised its estimate for the annual neutral interest rate in real terms, to 3.6% from 3%.

“If monetary policy is underpowered, the interest rate has to be higher. To stabilize inflation, you need to make a greater effort, so the neutral interest rate is higher,” she said. “Fiscal deterioration puts a burden on interest rates. There is no way. Monetary policy and fiscal policy are communicating vessels.”

Carlos Kawall, director at Asa Investments, says that “monetary policy clearly gained potency when there was the change of the parafiscal regime [linked to BNDES and subsidized interest rates] and the implementation of TLP.”

“Today it doesn’t seem that we have an ineffective monetary policy,” he said.

According to him, inflation in Brazil is “higher than the global average, but not as high as it was in the past.” The path of prices “higher and more resistant to decline” is a common factor to emerging countries, compounded in Brazil by the “inertial component,” which is how much past inflation affects current inflation. For Mr. Kawall, using the comparison between the cycle of interest rate hikes and inflation projections to say that monetary policy has little power is to “criticize the medicine instead of look at the disease itself.”

Source: Valor international

https://valorinternational.globo.com/

Central Bank explains inflation target burst in 2021

O presidente do Banco Central, Roberto Campos Neto, durante lançamento do Novo Marco de Garantias.

The COVID-19 pandemic, the increase in the global price of commodities (primary goods with international price quotation) and the water crisis were the main reasons that justify the failure to meet the inflation target in 2021, the president of the Central Bank Roberto Campos Neto said. Due to a legal order, he sent this Tuesday (Jan. 11), a letter to the Minister of Economy Paulo Guedes, and to the National Monetary Council (CMN) justifying the official inflation of 10.06 percent in 2021, according to the Extended National Consumer Price Index (IPCA).

The official inflation target for last year was 3.75 percent, with a range of tolerance of 1.5 percentage point. The index, therefore, could vary from 2.25 to 5.25 percent. This was the sixth time, since the creation of the current inflation system, in which the president of the Central Bank had to justify the failure to meet the target.

According to Campos Neto, much of the high inflation in 2021 was a global phenomenon driven by the COVID-19 pandemic. The disease affected trade flows across the planet, creating bottlenecks in the distribution of products. According to him, the phenomenon affected not only emerging countries, but also developed economies.

“Pressures on commodity prices and on global production chains reflect the changes in consumption patterns caused by the pandemic, with a proportionately greater share of demand directed to goods,” Campos Neto wrote. “In fact, the significant acceleration of inflation in 2021 to levels above the targets was a global phenomenon, affecting most developed and emerging countries.”

The last time the president of the Central Bank justified the noncompliance with the inflation target was in 2017. However, inflation ended that year below the target floor, at 2.95 percent, against a minimum limit of 3 percent for the IPCA.

Source: Agência Brasil

https://agenciabrasil.ebc.com.br/en

Central Bank sees inflation above target in 2023

Inflation, hyperinflation and deflation? | Tendercapital

The fiscal situation is already making the Central Bank’s Monetary Policy Committee (Copom) to project inflation above the target also in 2023. Therefore, the policymakers calculate that, in the next two years, Brazil’s benchmark interest rate Selic will need to stay above the market projections until early December.

This is shown in the minutes released Tuesday, referring to last week’s meeting, when the Copom raised the basic interest rate to 9.25% per year from 7.75% per year. In the minute, the monetary authority also recognized that economic activity lost steam in the short term.

“The Committee pondered that the risk of a deanchoring of longer-term expectations, derived from developments in the fiscal scenario, points to an upward bias for the projections of its baseline scenario,” the Central Bank said. “Hence, considering this bias due to asymmetric risks, Copom evaluated that its projections are above the target for both 2022 and 2023.”

Thus, the committee “concluded that the monetary tightening process should be more restrictive than that used in the baseline scenario throughout the relevant horizon.” Currently, the Central Bank’s relevant horizon includes, with equal weight, 2022 and 2023, with inflation targets of 3.5% and 3.25%, respectively.

The Central Bank’s baseline scenario assumes the Selic trajectory taken from the Focus Bulletin, which presents the median of projections from financial firms, consultants and asset managers collected in the week prior to the Copom meeting.

This trajectory pointed to the basic interest rate rising to 11.75% per year, but ending 2022 at 11.25% per year and 2023 at 8% per year. In this case, inflation projections are 4.7% and 3.2%, respectively. But this scenario does not take into account the asymmetry caused by the fiscal framework, which in practice increases the inflation expected by the Central Bank.

In the minutes, the monetary authority showed that it used “different terminal rates” of the Selic to simulate its inflation projections. In addition, it compared “adjustments greater” than 150 basis points of the Selic rate per meeting “with scenarios in which the interest rate remains high for a longer period than that implied in the baseline scenario.”

The committee concluded that adjustments of 150 bp “at this moment are adequate to reach, throughout the process of monetary tightening, a level restrictive enough,” it said. In the Central Bank’s calculations, this level is “restrictive enough” not only “to ensure the convergence of inflation over the relevant horizon but also to consolidate the anchoring of longer-term expectations.”

In the document, the Central Bank warned that the questioning about the “the future of the current fiscal framework” results in “increased risk premia and raised the risk of deanchoring inflation expectations.”

“This implies assigning greater probability to alternative scenarios that consider higher neutral interest rates,” it stated, referring to the rate that neither accelerates nor decelerates to inflation.

In the opposite direction, the Copom removed an excerpt from the previous minutes that stated that “public accounts have performed better than expected.” Also was excluded an excerpt that stated that “assuming the current fiscal framework is maintained, in particular the control of spending growth, Copom’s projections foresee a falling trajectory for the public debt as a percentage of GDP.”

In the case of economic activity in Brazil, the committee highlighted that it “revised downward its expectations for activity in the short term,” drawing attention to three main points. The third quarter GDP showed, for example, “a slightly lower-than-expected evolution, although the activities most affected by the pandemic continued on a robust recovery path.”

Meanwhile, high-frequency indicators “point to reduced economic activity, widespread among various sectors, in September and possibly in October.” “Likewise, the already available confidence indexes for the initial months of the current quarter show deterioration,” it stated.

For next year, the Copom said that there are factors that will influence economic activity in both directions. Pressing activity down are “the rise in risk premia and the more intense tightening of financial conditions.” But agriculture, services and the labor market tend to benefit growth, according to the Central Bank.

In turn, consumer inflation remains “high, with increases spread among several components, and has proven to be more persistent than anticipated.” An example is the rise in industrial prices, which “has not slowed down and should persist in the short term.” Inflation in services “accelerated due to the gradual normalization in the sector’s activity, as expected.”

“Recent readings were higher than expected,” stated the Central Bank, highlighting that “the surprise” came in both the more volatile components, and on the items associated with core inflation, the one most sensitive to interest rates and economic activity.

“Prospectively, the significant drop in international energy commodity prices, which have had substantial volatility, has limited the upward revision of short-term projections,” it stated.

Finally, the Copom reiterated that the global outlook “has become less favorable”, citing, among other factors, “the real estate sector situation in China.” For the policymakers, along with a possible new wave of the pandemic in the main economies and the omicron variant, the factor linked to China generated “produced falls in some important commodity prices.”

“But it is still too early to predict the extent of this movement,” it said.

Source: Valor international

https://valorinternational.globo.com/