Brazil braced for a second wave of inflation

. Jan 11, 2021
inflation brazil coronavirus crisis Photo: Anton Watman/Shutterstock

When inflation in Brazil began gaining steam in 2020, attention turned to segments where demand increased — or remained the same — during the pandemic, namely food and raw materials. After eye-watering rises in prices of necessities, the end of the government’s coronavirus emergency salary is likely to see consumption fall and thus bring inflation back under control. However, services are set to see significant price increases in 2021, meaning that Brazilians could be on the cusp of a “second wave” of Covid-19-related inflation.

The question is: how big will it be, and will the population’s pockets be able to handle it?


the biggest example of this new wave of inflation will come in the private health sector. Last year, Congress banned health-maintenance organizations (HMOs) from increasing their insurance premiums, arguing that these price rises could diminish the population&#8217;s access to healthcare amid the pandemic. Twenty-five percent of Brazilian citizens are health insurance policyholders.</p> <p>In December, the National Supplementary Health Agency (ANS) decided that HMOs must dilute their planned premium increases over 12 months in 2021. Along with annual price adjustments for this year, experts heard by website 6 Minutos <a href="">say</a> some consumers could see their private health plans become 30 percent more expensive in 2021.</p> <p>In an emailed statement to <strong>The Brazilian Report</strong>, Brazil&#8217;s HMO association Abramge said that 2020’s intended price spikes refer to the period of 2019. During the pandemic, companies had to continue paying taxes based on updated prices, but were not allowed to pass these increased costs on to consumers.&nbsp;</p> <p>Regardless, the private health sector performed well in 2020, after a brief scare in March. According to ANS&#8217; most recent data, health-insurance plans saw a net addition of 370,000 policyholders. However, the sector has never been able to return to its all-time peak of 50 million users in 2014, raising doubts about whether demand will be able to absorb 30-percent premium increases.</p> <h2>Private schools feeling the pinch</h2> <p><a href="">Most schools across Brazil have remained closed</a> throughout the coronavirus pandemic, even when states lifted most of their strictest social isolation rules. According to Christian Rocha Coelho, CEO at education-specialized consultancy Rabbit, many schools managed to save money during the pandemic thanks to reduced costs on their physical structure and the cutting of transportation benefits for employees. However, this was more of a postponing of expenses rather than real savings.</p> <p>“In Manaus, when classes resumed in September, costs spiked by 15 to 18 percent. Not only did their regular expenses return to normal, but they had to hire more professionals, as previous employees were part of the risk group. And they had to adapt their schools to meet health protocols,” he tells <strong>The Brazilian Report</strong>, adding that this cost increase is likely to be seen all over the country.&nbsp;</p> <p>And this increase in costs has come in parallel with financial hardship for much of the population. Mr. Coelho estimates that defaults on tuition fees reached 25 percent by year-end. To make matters worse, families are delaying enrollments for the new school year due to the uncertainty regarding the pandemic and whether classes will remain online.&nbsp;</p> <p>“Normally, the peak of enrollments happens by November and, on average, 65 percent of them are finished by January. This year, only 25 percent of students were enrolled by January,” he explains.&nbsp;</p> <div class="flourish-embed flourish-hierarchy" data-src="visualisation/4928221"><script src=""></script></div> <p>In his view, parents are delaying enrollment for as long as possible to wait for definitive information on vaccines and whether governments will allow schools to hold in-person classes. Other families, meanwhile, simply opted to transfer their children to public schools. According to data obtained by <strong>The Brazilian Report</strong> from the São Paulo State Department of Education, student transfers from private elementary and high schools to the public network rose by 31 percent in 2020, to 16,607 students.</p> <p>“As soon as in-person classes resume, kids will be back,” Mr. Coelho predicts. But this uncertainty and inability to accurately forecast costs and revenue is likely to cause major headaches to the school system.&nbsp;&nbsp;&nbsp;</p> <p>Considering all the factors, Rabbit advised 1,504 schools to increase their tuition fees by between 6 to 9 percent in 2021. Most of them, however, opted for 5 to 8 percent spikes — above inflation but not enough to offset costs.&nbsp;</p> <h2>Market adaptations</h2> <p>Indeed, the real estate market could provide an indication on what is to come for other sectors. Brazil&#8217;s IGP-M price index — which tracks the cost of raw materials — is also arbitrarily used to apply inflation to rental contracts. As people spent more time at home, renovations and civil construction remained strong, causing the IGP-M to finish the year with a 23.14 percent increase, which is automatically passed on to rent checks.</p> <p>With many consumers unable to bear the cost of a 23.14 increase to their rent, the market has been forced to adapt. Real-estate startup Quinto Andar announced that contracts signed from November 26 onward would be able to adopt the Broad Consumer Price Index (IPCA) — the official inflation rate used by the Central Bank — for annual readjustments. According to Quinto Andar&#8217;s head of communications José Osse, almost all of the “several thousand deals signed by [the company] since are already using the IPCA.”&nbsp;</p> <p>The pandemic also disrupted other trends in the real estate market, with people ignoring single room apartments and opting to rent in peripheral neighborhoods. As a result, average rent fell by 6.3 percent in São Paulo and 3.5 percent in Rio de Janeiro over the year, according to Quinto Andar&#8217;s data. “When negotiation was not possible, many people chose to move instead of paying [the increased rent]. That shows that, for landlords, it is more advantageous to renegotiate,” says Mr. Osse.

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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