Inflation estimates exceed 7% as frost hits Brazil

RIO DE JANEIRO, BRAZIL – Last week’s frosts and their forecast until tomorrow will pressure food prices and contribute to an already complex inflation scenario, which is leading economists to revise their projections for the National Broad Consumer Price Index (IPCA) for 2021.

Estimates are starting to exceed 7%, almost 2 percentage points above the Central Bank’s inflation target. If this happens, this year Brazil will register the highest inflation since 2015, when it reached 10.67%.

Santander currently projects an IPCA of 6.7%, but given the expected increase in food and the water crisis – which should pressure overall prices – the bank’s economists are now talking about higher levels. “With all the current risks, the IPCA is looking more like 7.3%,” says economist Daniel Karp.

Tendências consultancy currently projects 6.1%, but, according to economist Marcio Milan, this figure will soon be revised. “Clearly, there is an upward trend,” he says.

Still projecting 6.7%, XP released a report yesterday in which it says it believes prices may rise above 7%. According to economist Tatiana Nogueira, the document’s author, the company must wait for the start of next week to analyze the impact of frosts expected to occur through tomorrow and then officially change its estimate for inflation.

Current projections contrast with what was expected at the start of the year, when prices were forecast to increase by around 3.5% in 2021. So far, the main inflation driver has been gasoline, which, according to Tendências is expected to rise 24.5% with the increase in global demand resulting from the economic upturn.

The water crisis has also become a cause for concern in recent months. With the water shortage and the consequent readjustments in the electricity bill, the energy hike has now added 0.68 percentage points to the IPCA and may add another 0.13 points if a new adjustment is approved – as expected – according to Santander.

Now it is frost giving a further boost to inflation. For now, the production of coffee, vegetables and fruits suffered the biggest losses. With lower supply, prices should quickly rise.

XP estimates that this effect may mean another 0.1 percentage point to the IPCA. “Despite being a minor increase, this risk is the most likely. Farmers are reporting production losses already. This will probably affect the prices charged next week,” XP’s Tatiana says.

Another risk on the economist’s radar is a higher rise in service prices as a result of the economy reopening. She says this could add another 0.2 percentage point to inflation.

Damage in the fields

According to Santander, the impact of frost led economists to raise the IPCA projection for food from 7% to 8.2% this year. In the state of São Paulo alone, production loss is expected to average between 15% and 20%, according to the State Agriculture and Livestock Federation (FAESP). The organization’s vice-president Tirso Meirelles classified last week’s frost as the worst since 1975 for the sector.

Yesterday’s frost also damaged virtually the entire interior of the state. In Itapetininga, 20 hectares of pasture farmed by breeder Maria Cândida Soares Silva were destroyed by frost in the early hours of yesterday morning. She had to feed her Jersey breed dairy cows with feed. “The pasture was fertilized and was very good. During the last frost, the taller grass dried out, but now this time it has even reached the roots,” she lamented.

Strawberries were lost in Piedade. Banana plantations were affected in Apiaí. Some producers saved part of their production by bagging the bunches. Losses also occurred in Vale do Ribeira, the largest banana producing region in the state.