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The two Brazilian inflation rates during the pandemic

. Aug 10, 2020
The two Brazilian inflation rates during the pandemic Image: Torwai Studio/Shutterstock

The Brazilian Central Bank announced further cuts to the country’s benchmark interest rate (Selic) last week, bringing it to the lowest level in history. As the monetary authority’s leading tool to control inflation, it would be expected that low interest rates would be accompanied by equally small inflation. However, this is only half true, as the economic frenzy caused by the Covid-19 pandemic has thrown up some bizarre situations, even in the way inflation is measured.

When the Central Bank cut the Selic rate, the two main inflation indexes in the country were showing very distinct results. The prices of household goods, represented by the IPCA index, have been rising very slowly, even posting a rare spell of deflation in April and May.

Meanwhile, the general price index IGP-M — more focused on producers — is high and rising.</p> <p>Over the past 12 months, the IPCA consumer price index has risen by around 2 percent. The IGP-M, however, is close to 10 percent. The former is measured by the Brazilian Institute of Geography and Statistics (IBGE), while the latter is overseen by think tank Fundação Getúlio Vargas (FGV).</p> <div class="flourish-embed flourish-chart" data-src="visualisation/3433819" data-url="https://flo.uri.sh/visualisation/3433819/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p>The initial explanation for this discrepancy is in the different sorts of products and prices measured by each. IPCA concerns final prices, whereas IGP-M is broader, accounting for household goods (30 percent), producers (60 percent), and the construction industry (10 percent). It has this wider reach in order to serve as the deflator for Brazil&#8217;s official GDP figures, while it also serves as the basis for adjusting tariffs controlled by the government, such as electricity and phone services.</p> <p>Economist Andre Braz coordinates the FGV household price index, which makes up 30 percent of the IGP-M rate. He tells <strong>The Brazilian Report </strong>that while the prices of household goods are important, they alone are not enough to get a picture of price trends.&nbsp;</p> <p>“Indexes serve to understand where inflation comes from. The IGP-M measures impacts that go far beyond what families feel as inflation. It measures the effect of exchange rate devaluation on company costs, making commodities and the production base more expensive,” said Mr. Braz.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/3434116" data-url="https://flo.uri.sh/visualisation/3434116/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p>They are distinct in composition and have shown different behaviors during the pandemic. On the one hand, the level of consumption has a profound effect on prices for consumers, as a result of isolation measures and other restrictions. Meanwhile, the general index is more affected by exchange rates and the prices of commodities. “We are experiencing a huge currency devaluation, and the IGP-M shows this impact: iron ore, soybeans, corn, wheat, meat, are all quoted in dollars. It doesn’t matter if Brazil produces soy, it will be more expensive if the Real loses value, as the price is in dollars. <a href="https://brazilian.report/business/2019/01/19/brazil-currency-exchange-rate/">Dollarized prices</a> affect the producer more than the consumer,” explains the economist. In one year, the price of one U.S. Dollar in Brazilian Reals has increased by one-third.&nbsp;</p> <p>“Each sector of the Brazilian economy has different cost structures. With the pandemic, many services were interrupted. The <a href="https://g1.globo.com/ma/maranhao/noticia/2020/08/10/apos-tres-meses-em-queda-inflacao-sobe-057percent-em-sao-luis-no-mes-de-julho.ghtml">inflation</a>, for the consumer, is zero. But for the producer, if he makes machines, the important thing for him is the price of steel, of electronic components,&#8221; explains Mr. Braz.</p> <p>The economist doesn’t see both indexes reaching parity any time soon. The causes for the different behaviors persist, pulling prices down for consumers and causing uncertainty for global markets and developing currencies.&nbsp;</p> <p>“The exchange rate is affected by the international scenario; uncertainty <a href="https://brazilian.report/business/2019/07/01/brazil-longest-lasting-currency-real/">devalues the Brazilian Real</a>. There are also internal factors, our public accounts, and the political scenario. It will last as long as the pandemic does not allow a return to normal,” says the economist.</p> <h2>Rent inflation</h2> <p>For most Brazilians, the IGP-M index is commonly known as the inflation rate for rental housing, despite not actually having any direct link to the price of renting a home.&nbsp;</p> <p>For some time, rental rates have been adjusted annually in line with the IGP-M index, meaning that the cost of wheat, for instance, does not only have an impact on the price of loaves of bread in the supermarket, it also affects citizens&#8217; monthly rent payments. In cases where the Chinese economy demands more commodities, renting a home or apartment becomes more expensive in Brazil.</p> <p>“There is no economic explanation for the [effect of the IGP-M index on] rent; it was not suggested by those who calculate the rates. It started in the past with lawyers who followed economic indicators in the newspapers, who saw the IGP-M had increased and wanted to increase the earnings of property owners,&#8221; explains Mr. Braz.</p> <p>Admittedly, this doesn&#8217;t mean that tenants will be forced to pay an extra 10 percent in monthly rent as a result of the pandemic. In this particular case, the supply/demand relationship lies in renter&#8217;s favor, as there are a high number of options on the market that may force the lessor to negotiate.&nbsp;</p> <p>“The whole world is going through a difficult time, a large portion of the population has reduced income, unemployment. But the contract rules are not always adhered to. With weak economic activity and a lot of available real estate, sometimes it is better for the owner to negotiate rather than lose their tenant”, advises Mr. Braz.

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José Roberto Castro

José Roberto covers politics and economics and is finishing a Master's Degree in Media and Globalization. Previously, he worked at Nexo Jornal and O Estado de S. Paulo.

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