Brazil’s November inflation forecast highest since 2002, at 10.73% in 12 months

RIO DE JANEIRO, BRAZIL – With pressure from higher gasoline prices, Brazil’s official inflation forecast increased 1.17% in November.

The data are part of the IPCA-15 (National Wide Consumer Price Index 15). In October, the indicator recorded an even higher rate of 1.20%. The November variation came in slightly above financial market projections. Analysts expected an increase of 1.13% in the median.

With the November result, the 12-month accumulated inflation rate reached 10.73%. This is the highest mark for the period since February 2016 (10.84%). By October 2021, the accumulated figure reached 10.34%.

The official inflation index in the country is the IPCA (National Wide Consumer Price Index), also calculated by the IBGE. Given that it is released earlier, the IPCA-15 signals a trend for prices. Hence, it is known as a forecast.

In 12 months, the IPCA-15 is more than double the ceiling of the inflation target pursued by the BC (Central Bank) for the IPCA. The target ceiling in 2021 stands at 5.25%. The midpoint is 3.75%.

According to economists, the November data are increasing pressure on the COPOM (Monetary Policy Committee), which has been raising the benchmark interest rate, the SELIC, in an attempt to contain inflation.

The next meeting of the committee is scheduled for December 7 and 8. This will be COPOM’s last meeting in 2021.

The SELIC currently stands at 7.75% per year. For 2022, some economists are projecting a rate close to 12%.

“The situation is serious. It will demand stronger action from the Central Bank, because inflation is not going to end on its own. We are at risk of a new pass-through to prices in the coming months,” points out Ibmec-SP and Brasília general director economist Reginaldo Nogueira. “The result of the inflation forecast is increasing the pressure on the COPOM.”

In November, all 9 groups of products and services surveyed by IBGE registered price increases, according to the IPCA-15. The greatest variation (2.89%) and the main impact on the index (0.61 percentage points) came from transportation.

This group was influenced by gasoline, which rose 6.62%. The fuel had the highest individual impact on the IPCA-15 (0.40 percentage points). This year, gasoline has accumulated a 44.83% increase. In 12 months, the increase is even higher, 48%.

Another highlight in November was app-based transportation, which rose 16.23%, after increasing 11.60% in October. On the other hand, airfares fell by 6.34%, after soaring in September (28.76%) and October (34.35%).

Following transportation, the groups with the greatest impact on the IPCA-15 were housing (1.06%) and health and personal care (0.80%). They accounted for 0.17 percentage points and 0.10 percentage points, respectively, in the November index.

In housing, the largest contribution came from bottled gas (4.34%). Prices for the item rose for the 18th consecutive month, accumulating a 51.05% hike in the period since June 2020.

In turn, electricity (0.93%) had a lower variation than in October (3.91%). It contributed 0.05 percentage points to this month’s index. Since September, Brazil has been affected by the water scarcity tariff flag, which adds R$14.20 (US$2.55) to the electricity bill for every 100 kWh (kilowatt-hours) consumed.

Health and personal care items were influenced by personal hygiene (1.65%) and pharmaceutical products (1.13%).

“The IPCA-15 confirms a very negative perception for inflation in Brazil. We not only notice the strong impact of gasoline, we see inflation in almost all items,” says Banco Ourinvest chief economist Fernanda Consorte. “The Central Bank is likely to increase the SELIC adjustment pace in the meeting in early December. We have a very poor outlook for 2022.”

The inflationary escalation took shape throughout the pandemic. After paralyzing global production chains, Covid-19 created bottlenecks in the supply of inputs in several sectors.

The reflection of the shortage of raw materials was the rise in prices in the international market. In Brazil, this cost pressure was exacerbated by the devaluation of the Brazilian real against the dollar. Amid political tensions and fiscal uncertainties, the Brazilian currency weakened in comparison to the American. The exchange rate is one of the criteria used by Petrobras to set fuel prices at its refineries. Therefore, when it rises, the dollar impacts items such as diesel oil and gasoline in Brazil.

As if the rise in fuel prices were not enough, which increases the cost of transporting goods and passengers, Brazil was also affected this year by the water crisis. The lack of rain forced the use of thermal power plants, with higher costs to generate electricity. The result is higher electricity bills in Brazilian homes. The drought has also affected the planting and harvesting of several crops in the country, thereby pressuring the final price of food in supermarket shelves.

Market analysts have been raising their projections for the IPCA. The most recent estimate in the Focus report, released by the Central Bank on Monday, November 22, points to an increase of 10.12% by the end of 2021. The projection reached two digits after the market perceived higher fiscal risks for Brazil.

The threat to the course of public accounts became clearer in late October, after the federal government jeopardized the spending cap to pay for parliamentary amendments and also increased the amount and number of beneficiaries of “Auxílio Brasil” (Brazil Aid), the substitute for “Bolsa Família” (Family Grant).

Fiscal uncertainty is considered a factor that may drive investors away from the country, reinforcing the devaluation of the Brazilian real against the dollar.

Siegen Consultoria partner-director economist Fabio Astrauskas points out that the price increases this year also pose a threat to inflation in 2022. This risk exists because several contracts are readjusted by inflation from previous periods. “There is an inflationary inertia. That is, past inflation is fueling future inflation,” he says. “This makes it more difficult to fight price hikes,” he adds.

According to the IPCA-15 data, 7 of the 11 capitals and metropolitan regions included in the survey had double-digit previous inflation in the year to November. Curitiba (PR) registered the highest increase: 13.69%. Brasilia (DF) is at the opposite end of the list, with the lowest accumulated inflation, at 9.77%. In São Paulo, the variation reached 9.82%, the second lowest, although it is still close to 10%.