IPCA at 5% in 2025 worries some economists amid effects of employment in the services sector

04/10/2024

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Alexandre Bassoli — Foto: Silvia Zamboni/Valor

Although the market’s median expectation for inflation in 2025 has been around 3.5% for months, some economists expect inflation to accelerate from this year to the next, especially due to the dynamics of service prices.

“My biggest concern is the tight job market,” said Alexandre Bassoli, chief economist at Apex Capital. He sees inflation ending 2024 at 4.2% and going to 5% in 2025.

“The monetary easing cycle started amid peculiar conditions, with economic growth that surprisingly accelerated and an unemployment rate that has fallen persistently to its lowest levels since 2015. Economic slack seems to be low,” he added.

According to the economist, it is already possible to see the tight job market translating into higher wages, which puts pressure on inflation in services, especially in more labor-intensive segments.

“Looking ahead, I don’t see this degree of tightness decreasing; on the contrary. The economy seems to be starting the year stronger than we had thought and I think we will see the effects of interest rates adjustment for a while,” said Mr. Bassoli.

Étore Sanchez, chief economist at Ativa Investimentos, highlights the dispersion of projections for the 2025 inflation. The median estimate in the Focus survey is 3.53%, but it ranges between 3% and 5.1%. Ativa expects an Extended Consumer Price Index (IPCA) of 3.8% in 2024, accelerating to 4.2% in 2025.

Next year’s inflation should be pressured by services, according to Mr. Sanchez. “We are experiencing an easing in the monetary policy despite the resilience of services inflation. Therefore, it is not expected to fall, especially because we don’t see the job market weakening,” he explains.

Mr. Sanchez also expects some offset coming from regulated prices, such as urban transportation. “Some prices haven’t been adjusted as 2024 is a municipal election year. That will only postpone inflation a little. Next year, it will come back,” he said.

Mr. Sanchez also expects more fluctuation in food prices in 2025. “It is a short-term cycle. In one year, farmers receive higher pay, which encourages an increase in productivity and planted area. The following year, it falls. Then, it rises again. It is natural to see volatility from year to year,” he said.

Therefore, according to Mr. Sanchez, only the prices of industrial goods could bring positive news for inflation in 2025. “Industry is linked to the international market, where we expect to see inflationary relief. The industry has largely reflected the import of disinflation, which I expect to continue next year, but it may not be strong enough to slow down inflation in 2025 as a whole,” Mr. Sanchez adds.

Gustavo Arruda, head of Latin America research at BNP Paribas, expresses uncertainty about a favorable contribution from industrial goods. “We buy into the idea that there is disinflation of industrial goods stemming from the global slowdown, from China, and from some lagged effects after the pandemic shock. It aided last year and still aids this year, but for 2025, it appears that this effect will be diminishing,” he said.

In addition to the pressure on services in the 2025 IPCA, Mr. Arruda points out the perspective of a still expansionary fiscal policy fueling demand, while monetary policy should move towards neutral territory. “I don’t think it will be expansionary, but it won’t be contractionary either, or it may be less restrictive.”

BNP Paribas projects inflation of 3.5% per year in 2024 and 4% in 2025. If the Central Bank fails to reduce interest rates to 9% per year, as BNP Paribas projects, or a little below that level, at the end of the cycle of cuts, by stopping it sooner than expected, the bank’s estimate for the 2025 IPCA will have to be revised downwards, said Mr. Arruda.

Mr. Sanchez highlights that Ativa’s projections for the Central Bank’s stance “differ slightly” from what the investment firm believes monetary policy should be at present. Ativa anticipates that the key rate Selic will remain steady at 10% until at least March 2025, at which point the Central Bank would begin considering 2026. He added that the Central Bank aims for inflation matching expectations “but has not been very successful in this endeavor.”

Projections for the 2025 inflation are crucial not only because the year is already present in the “relevant horizon” that guides the Monetary Policy Committee’s actions, but also because the reading that there is little room for reducing inflation expectations ahead impacts monetary correction and price dynamics, Itaú Unibanco points out in a report.

The bank estimates that a shock of 0.50 percentage points in inflation projections for one quarter leads to an increase of 0.36 percentage points in inflation in the following six quarters.

“Given the dynamics and balance of risks in the current scenario, which, among other factors, involves a more challenging international scenario and resilient economic activity and domestic job market, we see little room for reducing inflation expectations ahead,” economists Julia Gottlieb, Natalia Cotarelli, and Julia Passabom wrote in the report.

According to part of the economists who are wary about the 2025 inflation, one risk is the Central Bank being led to raise interest rates again next year. That possibility also faces uncertainties given the prospect of a change in its team. By the end of 2024, the federal government is expected to appoint a new president and two directors for the Central Bank.

“We see an increase in the Selic rate in the second half of 2025 as the most likely scenario given the inflationary situation. The Central Bank will probably be led to increase interest rates in a context of narrow economic slack and pressure on services inflation,” said Mr. Bassoli of Apex. He projects the Selic at 9.25% at the end of this year and 10.5% in December 2025.

Uncertainties regarding the Central Bank’s new composition affect inflation expectations for 2025. However, Mr. Arruda of BNP Paribas does not believe the change will necessarily mean the monetary authority will be dovish to the point of avoiding rising interest rates again, if necessary. “Each Central Bank is different. I think it may become more dovish than in the past, but that does not necessarily imply that we are moving towards an extreme situation,” he said.

*Por Anaïs Fernandes, Victor Rezende — São Paulo

Source: Valor International

https://valorinternational.globo.com/