Increases announced Thursday for gasoline (18.7%), diesel (24.9%) and gas (16%) is expected to raise Brazil’s official index by 1.52%

03/11/2022

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Petrobras raised fuel prices as oil escalates — Foto: Divulgação/Petrobras

The adjustment announced Thursday by Petrobras in the prices of gasoline, diesel and gas (LPG) did not surprise the market, but came higher and faster than the vast majority of economists expected, which caused immediate revisions in inflation expectations. The adjustment came after 57 days without hikes and was influenced by the Russia-Ukraine war, which caused the price of oil on the international market to skyrocket.

The hikes announced Thursday by Petrobras for gasoline (18.7%) diesel (24.9%) and LPG (16%) will probably lead to an impact of 0.4 percentage points (p.p.) on the official inflation, as measured by Brazil’s benchmark inflation index IPCA for March, and to a rise of 0.35 p.p. in the IPCA for April. In other words: a total impact of 0.75 p.p. on the rates of March and April’s indicators. These calculations were made by André Braz, the economist at the think tank Fundação Getúlio Vargas (FGV) who oversees the General Price Indexes (IGPs). Before the company’s announcement, the economist expected an annual IPCA around 6% to 6.5% by the end of the year.

It means that in the event that no other product but fuel saw prices increase, the official inflation rates for March and April would already swell by at least 0.75% in both months. In the case of the IGPs, the specialist reckons hikes of 0.75 p.p. on the IGP-DI for March, and 0.35 p.p. on the IGP-DI for April, caused by increases after 57 days on the prices of the three fuels made by Petrobras and affected by the war in Ukraine, which induced the price of oil to skyrocket.

Soon after the announcement, LCA Consultores raised IPCA expectations for the end of 2022 to 6.5% from 6.01%. “The direct impact of these diesel and gasoline increases on the IPCA is 0.5962 percentage points,” economist Fábio Romão said.

LCA now projects a 10.58% inflation for the transportation group at the end of the year – the previous forecast was 8.72%. The projection for the food and beverage group varied less, to 7.16% from 7.02%. “Specifically on food, I have very recently incorporated the effects of commodity hikes via the war. Hence the modest change in this update. In fact, before all this adjustment caused by the Russia-Ukraine [war], we had +5.8% for food and beverages and now it is at +7.16%,” Mr. Romão said.

J.P. Morgan also raised its projection for IPCA in 2022 to 6.5% from 6%, also incorporating the prospect of even higher prices for other commodities.

“Petrobras announced increases of 19.2% and 24.9% in gasoline and diesel prices, respectively. This is higher and earlier than our assumption of two 8% increases between March and April,” economists Vinicius Moreira and Cassiana Fernandez wrote in a report. In their estimates, the larger-than-expected hikes adds about 0.15 percentage point to the bank’s IPCA forecast. “As it came earlier than expected, it increases our inflation estimates for March and April, but has a downward effect in May, as we do not expect another increase in mid-April,” they say. The February IPCA, which will be released on Friday, will be important to adjust short-term expectations, they added.

Santander has also signaled that it will update its inflation estimate. “We were already considering a 10% adjustment in our scenario. Therefore, the surprise in relation to our projection for the gasoline increase was lower, by 9 points, which should add 0.17 p.p. to the annual inflation,” said Daniel Karp, an economist at the Spanish bank in Brazil, pointing out that the IPCA increase in the current month is expected to be raised to around 0.95% from 0.81%. “For 2022, our official forecast is 6%, but after the recent commodity shocks and the gasoline adjustment, the tendency is for the number to go to around 6.7%,” he added.

Mr. Braz, with FGV, says that, as the conflict in Eastern Europe shows no signs of ending in the short term, there is no way to know for sure if oil prices will continue to soar. Brent crude trades above $100 since the war started, he recalled, and there is no way to know if there will be other adjustments in fuels.

The first preview of the General Price Index (IGP-M) for March, unveiled on Thursday by FGV, showed stability, compared to a high of 1.38% in the same preview in February, favored by a drop of 11.77% in the price of wholesale iron ore. “But with the hike [of fuels], this first preview [prepared before Petrobras’s announcement of more expensive fuels] no longer represents the reality of inflation,” he said, adding that the first preview is outdated.

Another warning sign mentioned by him, besides possible new fuel price increases due to the war, is the fact that indirectly higher fuel prices make other non-oil related products more expensive. “It’s going to increase freight costs, production cost,” he said, noting that the country’s item transportation logistics are dependent on trucks, which run on diesel.

“Those hikes will spill over to other sectors,” he said. Mr. Braz also recalled that there are other products that take petroleum in their preparation, such as PVC pipes, for example, which are expected to become more expensive because of the rising barrel — putting pressure on inflationary indicators.

Outside the oil sector, the specialist also reiterated the warning of a rise in prices abroad of commodities from the agricultural sector, also because of the war. This is because the conflict region is a producer of wheat, rye and oats, items that have a long chain of products in Brazilian retail.

“The war is far from over” he said. “And even if it ends, sanctions on Russia are expected to remain,” he said, noting that this will restrict access to products from Russia, such as wheat for example, in the global supply, which raises prices in the domestic market.

He made one warning, though. It is not impossible that oil prices to go down just as they skyrocketed when the conflict started, depending on the resolution of the war. “We have to take into account that oil is still fluctuating,” he said. “We have to wait and see how the post-war will be and how the relationship of other countries with Russia will be,” he said.

Source: Valor International

https://valorinternational.globo.com