Villains of Brazil’s inflation in 2021: Fuels should remain stable this year

RIO DE JANEIRO, BRAZIL – Diesel was the fossil fuel that rose the most last year, 46.8% compared to 2020, according to the Fuel Price Survey of the National Petroleum, Natural Gas and Biofuels Agency (ANP).

The second highest increase was gasoline (46.5%), followed by Vehicular Natural Gas (40.1%) and cooking gas (35.8%). The hike followed the price of oil on the international market, which in a year of instability rose approximately 40%, in the wake of the global economic rebound with the progress of Covid-19 vaccination.

To compound matters, ethanol also soared in the domestic market, with producers prioritizing the production of sugar, booming in the global market, thereby reducing domestic supply. According to the ANP, ethanol surged 60% at filling stations last year.

Overall, fuels, along with electricity, were the main villains of inflation in 2021, which should close the year above 10%, according to analysts.

However, this scenario should not be repeated this year, says the Getúlio Vargas Foundation (FGV) price indexes coordinator André Braz, despite the fact that oil is returning to last year’s highs, at around US$80 per Brent barrel.

“Fuels will no longer be the main villains this year, as was the case last year. Last year we had a strong exchange devaluation and an increase in the dollar price of oil, and there was a demobilization of the production chain, which is being resumed this year,” Braz explained.

He points out that although the Omicron variant of Covid-19 is on the global radar, threatening the recovery of major economies, it should not have the same impact that the pandemic had last year. “We are likely to have more stable prices this year,” he said.

Another difference in relation to 2021 is the winter in the northern hemisphere, which has been less harsh than last year, when refineries had to shut down because of high temperatures.

In Braz’s estimate, the official inflation measured by the Extended Consumer Price Index (IPCA) should drop by half compared to 2021, to 5.2%. “My projection for this year is above the market’s expectations, which is the ceiling of the inflation target (5%), precisely due to the political risk of an electoral year, especially in the final stretch of elections, which leads to currency devaluation with chances of affecting inflation in 2022,” he said.

According to the Researcher of the Institute for Strategic Studies of Petroleum, Natural Gas and Biofuels (INEEP) Henrique Jager, oil should drop slightly in the first half of 2022, with the end of winter in the northern hemisphere, but derivatives should remain at current levels, with the recovery of the margin of gas stations, which did not pass on the entire increase by Petrobras last year.

In Petrobras’ refineries, the gasoline hike reached 63.3%. Another aggravating factor will be the continued high price of sugar in the international market, which should keep the price of this biofuel high, affecting gasoline, whose mixture is currently at 27%.

“There isn’t much room for a reduction in derivatives, only if Petrobras reduces the price at the refinery by political decision, which would be very bad for the company,” he said.