Rental Inflation in Brazil Soars Amid Pandemic. Why?

RIO DE JANEIRO, BRAZIL – While official inflation as measured by the IPCA (Extended National Consumer Price Index) has accumulated 2.44 percent in 12 months – well below the four percent target set by the National Monetary Council for this year – the IGP-M (General Market Price Index) exceeds 13 percent in the period. Called rent inflation, the index is used as a reference for contract readjustments, including leases, but the index is affected by commodities prices having nothing to do with rentals.

In its quarterly inflation report, the Central Bank this week accepted that there is a disconnection between producer and consumer prices, the difference observed in August being the highest since 2003. The Broad Producer Price Index (IPA), which comprises price variations of agricultural and industrial products, such as commodities and supplies, represents 60 percent of the IGP-M.

“This part of commodities is very volatile. If the exchange rate rises, the value will too”, explains Julia Passabom, Itaú economist. In the year to date, the Brazilian real has already depreciated 38 percent in relation to the dollar.

The main industrial commodities, such as soy, wheat, iron ore, pasture cattle, farm chicken, coffee, orange, and others are increasing by 50 percent, according to André Braz, IPC coordinator for the Brazilian Institute of Economics of the Getúlio Vargas Foundation (FGV/Ibre). “In part, this increase is sustained by a greater demand from countries like China. There is also an increase in dollar prices which, added to the exchange depreciation, produces this effect”, he says.

The IGP-M also has in its composition 20 percent of Consumer Price Index (CPI) and ten percent of National Index of Construction Cost (INCC).

Although the prices of industrial goods are inflated, consumer prices have not absorbed this trend.

This is partly explained by the output gap, according to Passabom, ie the industry is not yet using all its installed capacity to produce. Another part of this scenario relates to the fact that the end consumers are still unable to afford this increase so that the readjustments are not passed on by producers.

“We are experiencing a bit of this tug-of-war now: the IGP is very strong, but people are still losing income,” says Passabom.

Source: Exame