Brazil has deflation in July and IPCA drops 0.68%, pushed by fuels and power
- August 10, 2022
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It was the lowest rate recorded since the beginning of the historical series, in 1980, amid the cut in fuel taxes.
THE inflation in the National Broad Consumer Price Index (IPCA), the main Brazilian inflation index, closed the month of July with a drop of 0.68%. The result was released this Tuesday, 9, by the IBGE.
In the 12-month period, inflation was 10.07%.
In the seven months of this year until July, the accumulated high is 4.77%.
The July result represents deflation, when there is a negative variation in the index. It is the lowest inflation since the beginning of the historical series, which began in January 1980, according to the IBGE.
Usually, a deflation happens when the economy is slowing down. But, in the case of Brazil, the fall was mainly driven by the exemption of fuels and electricity, approved in June in Congress and which led states to reduce the ICMS on these inputs.
O Fuel prices dropped more than 14% this month (see details at bottom of page).
At the other end, food inflation remains under pressure, led by milk, which rose more than 25% in the month.
“This reduction [em combustíveis e energia] affected not only the transport group (-4.51%), but also the housing group (-1.05%), on account of electricity (-5.78%), “said in a note the research manager of the IBGE, Pedro Kislanov.
“It was these two groups, the only ones with a negative variation in the index, that pulled the result down.”
O INPC, an index that measures inflation in the basket of the poorest families (up to five minimum wages) also fell by 0.60% in July. The 12-month accrual of the INPC is 10.12%.
Impact on Selic
The July result was in line with the market consensus, which expected a reduction in accumulated inflation to 10.10%.
The expectation is that the accumulated inflation will come out of double digits in August and reach just over 7% by the end of the year.
Inflation in Brazil exceeded double digits in September last year, one of the worst since the implementation of the Real Plan, and has not fallen below that level since then (see chart).
The drop in the IPCA in July may reinforce the expectation that the Central Bank has already raised interest rates sufficiently to contain inflation, without the need for a new adjustment at the September meeting.
The thesis was strengthened by this week’s Focus bulletin, with the Selic forecast at 13.75% for the end of the year. Brazil has been under the highest basic interest rate, the Selic, since 2016.
However, part of the market also believes that the BC may still make some residual adjustment this year, with another increase in September.
In addition, there is expected pressure for inflation in 2023, with the return of temporarily cut taxes, exchange pressure with high interest rates in the US and Europe and the fiscal risk amid the Kamikaze PEC, which raised the value of Auxílio Brasil to Rs. $600 and created a trucker voucher.
Inflation projections for 2023 have been rising, and the median of bets for the IPCA next year was 5.36% in this week’s Focus bulletin.
Cheaper gasoline, milk on the rise
Of the nine groups surveyed by the IBGE, two fell in the month of July and the others rose.
The biggest drop was in the group Transport (-4.51% in June, after a 0.57% increase in June). alone, the fuels fell by 14.15%.
In addition to cutting ICMS and federal taxes, Petrobras cut the price of gasoline twice in July, amid the drop in oil prices on the international market.
- the price of gasoline fell 15.48% in June;
- the ethanol dropped 11.38%;
- the vehicle gas dropped 5.67%;
- the diesel was the exception, and rose 4.59%.
Diesel was less impacted by the tax cuts because federal taxes were already zeroed for diesel previously, and ICMS was already lower on this fuel than on gasoline. In addition, a third of the diesel consumed in Brazil is imported and not refined by Petrobras, a larger share than gasoline.
In the IPCA, the group Housing also fell 1.05% (after rising 0.41% in June), due to the fall in the average price in residential electricity (-5.78%).
In addition to the reduction in the ICMS rate, the National Electric Energy Agency, the sector’s regulator, approved a review that reduced rates at 10 distributors in the country.
The biggest high, at the other end, came in the group food and drinks, which accelerated from 0.80% in June to 1.30% in July. The highlight was the cost of food at home (1.47% increase).
The main villain continues to be milk, which rose 25.46% and had the biggest positive impact on the monthly index (0.22 pp) among the items.
Along the same lines, dairy products had strong increases, such as cheese (5.28%), The butter (5.75%) it’s the condensed milk (6.66%).
Fruit also rose, up 4.4%. Other vegetables that had risen sharply at the beginning of the year continued to decline, such as tomato (-23.68%), potato (-16.62%) and carrot (-15.34%).