RIO DE JANEIRO, BRAZIL – The coronavirus pandemic reached Brazilian territory together with inflation, the generalized and persistent increase in prices in the economy. The Extended National Consumer Price Index (IPCA) grew 6.76% between May 2020 and April 2021. Some products pushed the index – more specifically, 156 of them grew above the IPCA average.
Below is a list of these items, with their respective price variation in the period. Economists also shared their views as to why the IPCA in the last 12 months has remained above the 5.25% inflation target.
Big villains: food and fuel
Lucas Souza, chief economist at Berkana asset manager, said that the IPCA’s rise in the past 12 months was due to two major factors: the currency devaluation pass-through to prices since March 2020 and the pressure exerted by commodities since September 2020. The dollar having become more expensive in relation to the Brazilian real only increased the already high commodity prices, because they are fixed in dollars.
“The higher international market prices for basic goods such as oil, wheat, cotton, ore, and soybeans are passed on in Brazil with even greater intensity due to the effect of the weaker real,” explains Souza. The impact is seen in the “Food” and “Transport” groups, which rose 11.5% and 12.3%, respectively. These categories represent almost 40% of the IPCA index.
“Food at home” was among the highest risers. Four of the top five positions are in this category: soybean oil (82.37%), rice (56.66%), beans (50.71%), and brisket (46.17%). Another highlight is the “Fuels” category, with ethanol (37.16%), gasoline (35.59%), and diesel oil (24.56%).
“Oil is probably the strongest link between the much talked about ‘commodity boom’ and the higher prices in the economy as a whole. Almost everything we consume was generated from the use of oil in the production process. Therefore, the chain effect of the rise in oil prices impacts all other groups directly or indirectly,” says the economist.
Sérgio Vale, chief economist of MB Associados, agrees that commodities were the first big boost to the IPCA. The rise in basic products began in foodstuffs and moved on to fuels. Now, it is also in electric energy. “We have pressures on several fronts,” he says.
Higher prices inside and outside the home
The rise in commodities also impacts items that do not seem as basic. In “Clothing”, the highest rises were in jewelry (21.89%) and wristwatches (11.89%). According to Souza, the jump in metallic commodities (gold, silver, copper and nickel) explains the rise in these categories. “Gold priced at US$1,600 a Troy Ounce in early March 2020 is now close to US$1,900 a Troy Ounce. In the case of copper, which is widely used in electrical circuits, the commodity’s contract price on the London Metal Exchange has increased by more than 30% in the last 12 months.”
But the dollar and soaring commodities are not the only culprits for inflation. The sudden explosion in demand for some items has also been reflected in higher prices in other categories.
Despite social isolation, the category “Food outside the home” also posted price hikes, in items such as wine (10.20%), snacks (8.33%), coffee (8.17%) and sweets (7.21%). “These are products that people consume, also on delivery. The emergency aid was important for Food as a whole,” says Vale.
This was also the case for construction materials and household appliances. “The combination of social isolation and the financial boost from the emergency aid enabled millions of citizens to conduct minor repairs on their own, and to replace spending on services shut down by the pandemic with spending on goods,” says Souza.
Mattresses (52.75%) were the only item that ranked in the top 5 of non-food hikes. This is one of the items in the “Furniture and utensils” category, which also posted a significant increase in fresh flowers (31.99%) and bedding (15.06%). “Housing” was another category that marked its presence, with items such as hydraulic material (32.24%), bricks (31.28%), flooring (23.28%), and gas cylinders (21.09%). Finally, “Electrical and electronic appliances” are also on the list of products whose prices rose above the IPCA average, such as TVs (24.36%), video games (23%), and personal computers (20.85%).
In addition to this explosion in demand, the lack of supply also led to rising prices. “There was a shortage of supplies and production difficulties, which was reflected in the lower supply of goods,” explains Vale.
“Producers’ compressed margins prevented the drop in demand from lowering prices. Costs increased more than the drop in demand. Producers have two paths: to pass through or not. In sectors where producers’ margins are very small, they will ultimately pass it through,” adds Souza. “We always consider the demand conditions with the pandemic, but we should also note the supply bottlenecks that the health crisis created.”
In “Personal Expenses”, the most expensive were bicycles (19.24%), musical instruments (16.40%), notary’s fees (9.38%), and pet food (9.12%). Internet access also grew above the IPCA average (8.51%). “In most of these cases, the combination of rising international prices, the dollar effect and the reallocation of consumption from services to goods contributed to the increase,” says Souza.
What does the future of inflation hold?
In the 12-month comparison, inflation should remain high in the short term. This is because the months of low inflation or deflation observed in the first half of last year are being replaced by months of higher inflation in the first half of this year.
According to Vale, the IPCA should close at 5.2% in the accumulated figure for 2021. The figure is lower than the 6.76% observed in the past 12 months, but it is still high. It is close to the ceiling of the inflation target for this year. The inflation target stands at 3.75%, with a ceiling of 5.25%.
“The IGP-10 grew strongly in May, indicating the pressure that we will still have in the wholesale market due to the shortage of supplies. We also expect an economic recovery, albeit slow. It may boost demand for services,” says Vale.
Souza says that the trend is for an improvement in inflation rates in the second half of the year. “There is no reason for commodity prices to remain high for a long period, once the economy is reorganized and supply recovers. In terms of exchange rate pass-through, the dollar has been exerting less pressure since April this year.”
Vale also stresses the concern with inflation in 2022. “For now inflation is projected at 3.5%. But it is expected to grow gradually, and that the Central Bank will move away from the 3.5% target – just as occurred in 2020, and will probably be the case in 2021.”