Brazil’s state-controlled oil company Petrobras announced yesterday an increase in fuel prices. As of today, the price of gasoline and diesel at refineries has risen by 16.27 percent (BRL 0.41 per liter) and 25.82 percent (BRL 0.78 per liter), respectively. Market analysts believe that this price hike will have a significant impact on the 2023 inflation target and are already revising their projections.
This was the first price increase announced by the company since the implementation of its new pricing policy. Previously, Petrobras had linked its fuel prices to fluctuations in the international market.
This increase had been expected by the market, as the company’s current prices remain disconnected from international market rates. In addition, under the leadership of CEO Jean Paul Prates, appointed by President Luiz Inácio Lula da Silva, the company announced a reduction in dividends to investors.
Analysts say these measures signal the company’s intention to prioritize investments and mitigate excessive fuel price volatility. As a result, the government wants the impact of gasoline and diesel prices on inflation to be less pronounced.
Nevertheless, the market believes that this price hike will have a significant impact on the 2023 inflation target. Despite the existing disparity in the prices of fuels produced by Petrobras, the ongoing increase in Brent crude oil prices, which is expected to continue, will put further pressure on prices in Brazil.
End-of-year inflation forecasts in Brazil were already close to the upper 4.75 percent target limit set by the Central Bank. With the new fuel prices, various analytical firms have revised their projections upward. For instance, Warren Reno adjusted its inflation expectation from 4.6 percent to 5 percent for the end of 2023.
Similarly, XP revised its projection from 4.6 percent to 4.9 percent. Itaú now anticipates annual inflation of 5.1 percent, with impacts as early as August and September.
And it is not only the end consumer that is likely to feel the effects of higher fuel costs. While gasoline prices have an immediate impact on retail, diesel is directly linked to wholesale markets. The General Price Index (IGP), which gauges this market, was on a deflationary trend of 4 percent, which is projected to decrease to 3 percent due to Petrobras’ recent announcement.
Given that Petrobras’ pricing still maintains a gap with international prices, there remains room for further hikes, potentially exerting additional inflationary pressure. However, this scenario is deemed unlikely according to Itaú’s analysis, even if oil prices reach USD 85 and the exchange rate hits BRL 5 to the dollar.
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