Inflation is the topic of the moment. A worldwide phenomenon that haunts several countries, including those who no longer even knew what the meaning of that little word was. For example, inflation in the US today exceeded the level of 8.0% in the last 12 months, being the highest value since 1981 - in fact, the average inflation in the US in the last 10 years before the beginning of the pandemic was 1.7 %. We can say the same about Europe, which had inflation below 2.0% before the pandemic and today that number has reached 8.1% in the annual average of Eurozone countries.
The rise in prices is a worldwide factor that spread rapidly after the pandemic due to reasons such as the expansionary fiscal policy adopted around the globe, the rise in commodity prices combined with the scarcity of certain products and, more recently, due to the war. in Eastern Europe, which ended up further hampering the supply of certain goods, resulting in, guess what? High in prices!
Here, in Brazil, it was no different. Although we are already more used to price bumps, in fact we had a more controlled inflationary scenario since 2017, with an average inflation of 3.5% until the beginning of the pandemic, that is, below the target established by the Central Bank.
However, since mid-2020, shortly after the beginning of the pandemic, we started to see an escalation in domestic prices for several reasons, among which we highlight: 1. Expansionary fiscal policy: with the advent of the pandemic, the government had no choice but to declare a state of calamity and dump a truckload of money into the economy to minimize the effects of the lockdown necessary to combat Covid-19, in an environment of historically low interest rate; 2. Real devaluation: directly impacting production costs, as our economy is very dependent on imports of products from China and the USA, mainly; 3. Rise in commodity prices: which ended up causing a sharp rise in domestic food prices. The industrialized food group is based on some raw materials dependent on agricultural commodities, such as corn, soy and wheat, for example, which are priced in dollars and have risen a lot throughout the pandemic. And these prices ended up being passed on to the domestic consumer. 4. Recovery of the post-pandemic economy: with the advance of vaccination and the resumption of normality in the economies, it was time to see pressure in the prices of services, which was one of the sectors most affected during the crisis. Masque in the recovery ended up going through a round of price increases too, after all, everything was already more expensive; 5. Finally, the famous inertia: inflationary inertia is basically a domino effect. It happens when there is an automatic price adjustment that is based on past inflation and ends up reflecting current inflation and so on. It's the "snowball effect". It is worth noting that inflationary inertia is quite high here in Brazil precisely because of the past we have with inflation. In other words, what developed countries like Europe and the USA are feeling now, we were already experiencing much earlier. The IPCA began to be pressured by food in mid-2020, jumping from 0.02% on a monthly average in the first half to 0.72% as of July 2020. As a result, we have had inflation above the target since then. So much so that our Central Bank started the monetary tightening cycle in March 2021 while the US and Europe are starting this cycle now. Are we a few steps ahead in terms of inflation? We believe so!
The question of the time is: how long will inflation rise?
Have we already reached the peak or is it possible that this situation worsens even more? First, it is worth remembering that we are still walking in an environment of strong uncertainty, mainly, coming from the delicate international scenario we are experiencing, with war and post-pandemic reflexes.
But we are seasoned with inflation and, as we said earlier, the Central Bank started the monetary tightening cycle here much earlier than other Central Banks, so it is possible that we can start to see light at the end of the tunnel. and that in the second half of this year the inflationary picture will begin to soften.
No wonder the May IPCA registered a variation of 0.47%, below the median expected by the market (0.60%) and showing a decrease in relation to the April indicator (1.06%). This month, the groups that most contributed to this reduction were housing (due to the drop in electricity prices, after changing the tariff flag to green) and food and beverages, which had a significant deceleration between April and May. It is true that inflation accumulated in 12 months is still at a high level, at 11.73%, but looking ahead, we see signs of a more encouraging second semester in terms of inflation.
So let's list below some reasons that may contribute to lowering inflation in the coming months:
1. Appreciation of the real: just as at the beginning of the pandemic, the rise in the dollar caused a strong advance in inflation in Brazil, especially in industrialized prices. The recent appreciation of the real – you see, we went from an average exchange rate of US$/R$5.4 in 2021 to US$/R$4.9 now in 2022 – that is, an appreciation of more than 8.0%. And the prices of industrialized products are already reflecting this fall in the dollar. As there is a pass-through between wholesale prices represented by the IGP-M to consumer prices, represented by the IPCA, part of this relief should be felt at the end of the year in the coming months.
2. Effect of monetary policy: one of the instruments used by the Central Bank (actually the most used) to contain the advance of inflation is the increase in interest rates. The pocket rule is as follows: by raising interest rates, it is understood that consumption should decrease and so prices adjust to a new demand, which will be weaker. Studies indicate that the effect of monetary tightening on prices takes place in a period of 6 to 9 months after the start of the interest rate increase. That is, it is possible that we have reached that period
3. One-off reduction of some taxes: the government recently announced that it intends to adopt measures to eliminate state taxes on fuel, in addition to reducing and limiting the ICMS ceiling for other goods. Although the measure has not yet been approved and there are some uncertainties on this topic (especially the effects on country and fiscal risk); if approved, the impact on inflation this year could be positive. 4. Decrease in administered prices: the main highlight here is the electricity prices, which suffered strong pressure last year due to the water crisis, which no longer exists this year. Therefore, consumers are already feeling the benefit of living with the green flag in their electricity bills in their pockets this year, as mentioned above. In addition, some administered prices should benefit from the fall in the dollar and others from the possible measures that will be adopted by the government. Would it be an inverse inflationary inertia? We hope so.
Thus, if in the first half of this year the average monthly IPCA was 0.9%, it is possible that the average monthly inflation in the second half of 2022 will be closer to 0.4%, precisely for the reasons mentioned above. Of course, these are still high values and we will still have inflation well above the target at the end of the year, but we believe the worst is over. Source: Ourinvest Bank