Has Brazil beaten inflation?

. Jan 14, 2019
The inflation o tomato prices in 2018 was of over 71%

Consumer inflation, measured by the benchmark IPCA index, ended 2018 at 3.75 percent. This was in line with analysts’ expectations and was within the target band of 3 to 6 percent, after missing it in 2017. The result indicates that price dynamics in Brazil are finally returning to what can be considered “normal” by most economists.

Over the past couple of years, the IPCA faced sharp variations and a period of tolerance with higher price increases from the mid-2000s to the early 2010s as part of a strategy to boost the economy via a heated consumption market.

This year’s increment is higher than the 2.95 percent recorded in 2017 and was mostly influenced by prices related to Housing (up 4.72 percent), Transportation (4.19 percent) and Food and Beverages (4.04 percent). These three groups, of a total of nine, were responsible for two-thirds of the increase, according to data published this Friday (11) by national statistics agency IBGE.

</span></p> <p><span style="font-weight: 400;">Márcio Milan, an economic analyst at Tendências consultancy firm, highlighted the inflation level in services, which has <a href="">finally dropped below 4 percent</a> after years of hikes around 8 percent. “The spike in unemployment and the shrinkage of the labor income helped to keep prices of services at a more comfortable level of 3.3 percent this year,” he says.</span></p> <p><span style="font-weight: 400;">In other words, the good news is a result of a bad overall scenario. Inflation only decreased because the Brazilian economy is still fragile. After one of its longest recessions in history, <a href="">activity is recovering at the slowest pace ever recorded</a>. </span></p> <p><span style="font-weight: 400;">Unemployment is steadily decreasing but remains high. Under-employment is the new game in town. Brazil has now more workers in informal jobs than regularly hired under its labor laws. That also means people are making less money and, therefore, curbing their spending.</span></p> <p><span style="font-weight: 400;">This context also limited the negative impact the depreciation of the Brazilian Real could have had on prices. As a significant portion of the inputs used by Brazilian farmers and manufacturers is imported, a strong U.S. dollar meant products became more expensive. </span></p> <p><span style="font-weight: 400;">“There was a spike in the foreign exchange rate by mid-year but due to the slow pace of the economy the higher costs to producers were not passed on to the consumers,” explains Camila Abdelmalack, an economist at CM Capital Markets.</span></p> <h2>The big villains, and the few good guys</h2> <p><span style="font-weight: 400;">The downside of these figures, Mr. Milan notes, were the prices controlled by the government. On average, they rose 6.2 percent, according to his calculations.</span></p> <p><span style="font-weight: 400;">When singling out all the 373 subitems that make up the IPCA index, the ones that individually contributed the most to the overall increase are “administered prices,” as they are known. </span></p> <p><span style="font-weight: 400;">An analysis carried out by </span><b>The Brazilian Report </b><span style="font-weight: 400;">shows that healthcare plans, residential energy, gas, and bus fares topped the ranking and accounted for one-third of the 3.75 percent increase last year. Just the top ten subitems make up for half of the full annual rate, having the same impact as all the other 363 remaining components.</span></p> <hr /> <p><img loading="lazy" class="alignnone size-large wp-image-13248" src="" alt="brazil inflation rate economy paulo guedes jair bolsonaro president" width="1024" height="604" srcset=" 1024w, 300w, 768w, 610w, 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <hr /> <p><span style="font-weight: 400;">Healthcare plans are the fifth most significant financial burden on Brazilians&#8217; budgets, according to IBGE’s methodology. The 10 percent price hike authorized by the National Healthcare Agency (ANS) took it to the top of the list.</span></p> <p><span style="font-weight: 400;">When it comes to energy prices, Mr. Milan explains that they are still being affected by compensations for a freeze in tariffs put in place in 2012 by then president Dilma Rousseff. “On top of that, it rained lower than expected this year, so energy production costs were higher,” he says, as 65% of Brazil’s power comes from hydroelectric dams.</span></p> <p><span style="font-weight: 400;">Brazilians also paid more for gas mostly due to the hikes in oil prices in international markets and the effects of a stronger dollar. Since Petrobras changed its pricing policy, in 2016, gas prices in Brazil have become more exposed to international fluctuations.</span></p> <p><span style="font-weight: 400;">As always happens, inflation was not higher because many items got cheaper. The drop in prices, known as deflation, affected nearly 80 subitems. The highlights were perfumes, ground coffee, and manioc flour, as the table below shows.</span></p> <hr /> <p><img loading="lazy" class="alignnone size-large wp-image-13247" src="" alt="brazil inflation rate economy paulo guedes jair bolsonaro president" width="1024" height="604" srcset=" 1024w, 300w, 768w, 610w, 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <hr /> <p><span style="font-weight: 400;">Their effect on the decrease in prices in Brazil is nearly symbolic, though. The combined impact of deflationary items totaled less than 0.38 percentage points. On the other hand, the 291 subitems that got more expensive last year added 4.13 percentage points to the index.</span></p> <h2>But will inflation remain under control?</h2> <p><span style="font-weight: 400;">A way to measure if the prices are definitely under control is to bring into the equation the inflation target system. Adopted in Brazil in June 1999, it establishes a goal for the price hike so policymakers implement measures accordingly—in this case, mostly the Central Bank and its monetary policy via changes to the interest rate.</span></p> <p><span style="font-weight: 400;">This kind of system is currently adopted by 28 countries, according to the International Monetary Fund. The goal is to control the rise in the overall level of prices to provide economic stability. The idea behind this economic framework is not to hit the target every single year, but to give predictability to the economic agents while providing room for policymakers to react to shocks if necessary.</span></p> <p><span style="font-weight: 400;">In Brazil, the system establishes a midpoint target and a symmetrical range of tolerance around it. When it was implemented, 20 years ago, the goal was keeping inflation at 8 percent. Since 2005, the target is at 4.5 percent. </span></p> <p><span style="font-weight: 400;">In recent years, the National Monetary Committee (CMN) has introduced <a href="">changes</a> after over a decade without modifications. Since 2017, the tolerance band was reduced from 2 to 1.5 percentage points. Additionally, in the following three years, the target itself will be lowered by 0.25 p.p, until it reaches 3.75 percent in 2021.</span></p> <hr /> <p><img loading="lazy" class="alignnone size-large wp-image-13249" src="" alt="brazil inflation rate economy paulo guedes jair bolsonaro president" width="1024" height="683" srcset=" 1024w, 300w, 768w, 610w, 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <hr /> <p><span style="font-weight: 400;">This will be the lowest inflation target in Brazil since 2002 when it was set at 3.5 percent. Back then, the benchmark index closed the year at 12.5 percent, however. In practical terms, this is the first time Brazil is actively pursuing—and has the conditions to deliver—inflation rates at similar levels to other emerging markets. Economists currently expect inflation to end 2019 at 4 percent, according to the Brazilian Central Bank’s latest Focus Readout.</span></p> <p><span style="font-weight: 400;">For Ms. Abdelmalack, Ilan Goldfajn’s performance at the head of the Central Bank played a big role in that process. “It is noteworthy that with a well implemented monetary policy and clear communication, the Central Bank recovered economic agents’ trust and contributed to the anchoring of expectations,” she says.</span></p> <p><span style="font-weight: 400;">Mr. Milan warns that such expectations rely on the assumption that Congress will approve the fiscal agenda, especially the pension reform, promised by president Jair Bolsonaro’s economic team. “If the reforms are not approved, even with lower targets, the price pressures will be higher in upcoming years”, he says. </span></p> <p><span style="font-weight: 400;">In summation, inflation control is not set in stone. “Brazil has not beaten inflation yet, but we are moving towards that”, says Ms. Abdelmalack. For the country to reach the 2 percent level adopted by most developed countries, though, there is still a long way to go.

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Mario Braga

Braga is a journalist from São Paulo. He is an Erasmus Mundus Journalism scholar pursuing his Master’s degree at Aarhus University (Denmark) and at the London’s City University.

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