RIO DE JANEIRO, BRAZIL – XP calculated that the frosts this week may impact inflation this year by 0.1 percentage point, with the potential of the IPCA hike exceeding 7.0% in 2021, according to a note issued on Thursday (29).
XP, which estimates inflation in 2021 at 6.7%, had already raised its projections for the rise in food prices at home for July due to frosts this month in several cities in the South and Southeast regions.
Given the new frost wave and higher prices of animal proteins, the scenario with a 7.3% hike in food prices consumed at home measured by the IPCA has upside risk, XP said.
“The crops most impacted by the drop in temperature are coffee, vegetables, and fruits. With reduced supply, prices tend to rise, and this pass-through is usually fast,” said XP in a note signed by economist Tatiana Nogueira.
The report highlighted that the intense cold aggravated a scenario that was already challenging for farmers since the severe drought has strongly impacted the prices of grains, sugar cane, coffee, and citrus. In addition, animal proteins also have high prices.
But the lack of rainfall also causes concerns regarding reservoir levels at historic lows, which according to XP, are close to what was observed in 2001 and 2014/2015, the latter period of the water crisis in São Paulo.
XP argues that the readjustment of 52% by Aneel of the extra fee charged with the red flag on home power bills, will not be enough, forecasting a new readjustment in the flag in its basic scenario, close to 20%, will have an impact on September bills.
In addition, the reopening of the economy already impacts the prices of services linked to the activity, with XP already taking this into account in its scenario for the second half of the year, but considering that a period of stress points to a risk of up to 0.20 percentage point in the projection for the IPCA.
“In 2021, the IPCA projection at 6.7% has asymmetric upside risks. With frosts and reopening of the economy on the radar, inflation could be above 7% for the year,” the report said, calculating inflation in 2022 at 3.6%.