RIO DE JANEIRO, BRAZIL – With no slack in wholesale price rises and with negative news on climate and the reorganization of administered rates, concern about inflation in 2021 is growing in the financial market, contrasting with the Central Bank (BC) argument that the shock seems temporary.
This week, the Focus Report, which includes financial market analysts’ projections, showed a new increase in the estimate for next year’s Broad Consumer Price Index (CPI) from 3.22% to 3.40%, moving increasingly closer to the target center pursued by the Central Bank (3.75%). Moreover, institutions which see inflation exceeding the central target in 2021 are no longer scarce, with estimates at 4.0%.
The November 15th CPI result of 0.81% above the average expected 0.72% from the Broadcast projections survey – could be a new driver for revisions. Thus, some houses are also starting to review their bets for the SELIC, the federal Treasury’s basic interest rate, anticipating the end-of-year monetary normalization to mid-2021.
The alert grew stronger with the successive surprises of wholesale products, which have not shown a slowdown of their sharp rise. Within the October General Price Index – Domestic Availability (GPI-DA) for the November 10th GPI, for instance, the Producer Price Index (PPI) slowed from 4.86% to 4.59%, with agricultural products rising from 9.51% to 9.49% and industrial products from 2.99% to 2.58%.
The concern is that the large increase in price in 12 months (33.04% of PPI, 61.02% of agricultural products and 23.66% of industrial products) will still be passed on to retail, which in the same period, according to the Consumer Price Index (CPI), has a rise of 4.18%. The Broad Consumer Price Index, the country’s official inflation, for its part, totals 3,92% in 12 months through October.
“There is no sign of deceleration of agricultural PPI, transfers to consumers (in food prices) should only decrease between two and three months after the beginning of price relief to producers,” says economist Alexandre Lohmann, from GO Associates, who already projects a Broad Consumer Price Index of 3.80% in 2021.
“We must also understand the extent of the climate problem in 2021. NASA released a letter recently saying that Latin America was experiencing its worst drought since 2002,” he points out.
Citing as main factors food and the La Niña risk, a climatic event that causes more rain in the North of Brazil and drought in the South, damaging crops, economist Carlos Lopes of BV Bank raised its Broad Consumer Price Index projection in 2021 from 3.10% to 3.60%.
Concern with administered (government controlled) prices
Another point that is gaining growing attention – and concern – from the market is the readjustment of administered or controlled prices this year because of the coronavirus pandemic. Last week, the National Supplementary Health Agency (ANS) authorized a maximum readjustment of 8.14% for individual and family health plans between May 2020 and April 2021.
However, given that because of the pandemic it can only be enforced as of January, the agency suggested that the increase should be spread over the next 12 months of next year. The problem is that a new readjustment may be authorized as of May. As a result, Credit Suisse bank, which already had above-target projections for 2021, at 3.80%, raised its estimate once again on Monday, November 23rd, to 4.00%.
“In terms of controlled prices, 2021 will be the return of those that were not”, says economist Andrea Angelo, from Canvas Capital, which projects inflation of 6,15% for the group and 3,50% for the Broad Consumer Price Index.
The sharp increase authorized by the ANS also raises concerns over readjustments for electricity next year. Regarding this item, Andrea projects an increase of 5.50% in 2021, in a scenario throughout the year. She also notes that it is likely to see more significant inflation in public transportation, which saw low readjustments in 2020 as a result of the municipal elections.
She projects a 4.0% increase in interstate bus fares (after 7.90% deflation in 2020) and 5.0% in urban buses (versus 1.58% in 2020). BV’s Lopes also mentions a change in the tariff plans for electricity bills.
JPMorgan and Barclays also highlight the dynamics of controlled prices in their Broad Consumer Price Index reviews to 3.60% next year. According to Roberto Secemski, Barclays’ economist for Brazil, there will be a switch of components in inflation next year, with food and marketable products yielding, with a drop in demand due to the end of the emergency aid limiting room for transfers, but an increase in government controlled prices (from 0.70% in 2020 to 5.40% in 2021) and services (from 1.80% to 2.90%).
“The figure in itself is not alarming because there is still slack in relation to the target, but the dynamics merit attention. Although we believe there will be less pressure from the ‘coronavoucher’ (the emergency aid paid by the government), assuming it is in fact discontinued, the pressure coming from the GPIs is quite significant. Readjustments are being made where possible at the moment. The pressure is there, the question is whether there will be a drop in 2021,” says Secemski.
In addition to all this, there is a prospect that the Brazilian real should not appreciate much next year, considering the current exchange rate, at around R$5.40. At Canvas Capital, Andrea declares that the risk of exchange rate pass-through to consumer inflation in 2021 is high.
Idleness
Some institutions do not yet see cause for concern about the dynamics of inflation and maintain a good margin between the 2021 projection and the official target center, mainly because of the prospect that unemployment is still expected to rise and idleness tends to mitigate price hikes.
In Mauá Capital, the Broad Consumer Price Index is expected to close 2021 at 2.8%, but chief economist Alexandre Ázara points out that the peak should occur at 4.5% in mid-year. “The recent rise in inflation is due to the food shock and some materials that were not produced in the short term. You can’t be worried about inflation with 20% unemployment, which is the figure found when we adjust the Economically Active Population (EAP) to long-term figures.”
With the Broad Consumer Price Index revision, the BV bank also changed its monetary policy predictions, anticipating the start of the interest rate increase from October 2021 to August. The SELIC annual rate is projected to close the year 2021 at 3%, against 2% in 2020.
In turn, Secemski considers that the Central Bank needs to watch the dynamics of inflation, but does not need to react yet with monetary policy, given that the recomposition will occur mainly in controlled prices. But Barclays is expecting a high interest rate from August, with the SELIC rate closing 2021 at 3.75% aiming at the 2022 target (3.50%).
At Quantitas Asset, despite recognizing a higher risk with respect to inflation dynamics, economist João Fernandes still believes that the trend is for the Broad Consumer Price Index to decelerate from the second quarter 2021 on. Therefore, the trend should not prompt a short-term reaction from the Central Bank. Fernandes’ base scenario is of an interest rate increase only in early 2022.
Soure: Estado