Country runs the risk of bursting inflation for 3 years and you become poorer

In 2021, the inflation target was exceeded. Everything indicates that the same will happen in 2022 and in 2023. Economists consulted by the UOL state that the Central Bank, led by Roberto Campos Neto, will complete three years in a row without fulfilling its main objective: to keep inflation within the established target.

Because it’s important? If it happens, it will be the worst performance in 20 years, since the period from 2001 to 2003, when the target was also not reached for three consecutive years.

What do you have to do with this? Inflation at high levels means you get poorer, your money loses purchasing power. Everyone pays more for a series of essential products, such as fuel and food. And your salary doesn’t keep up with that. What you could buy before won’t anymore.

What happened? The difficulties began in 2021: amid soaring commodity prices around the world, Brazil recorded inflation of 10.06%. The percentage was above the target pursued by the BC, which was 3.75%, with a tolerance margin of 1.5 percentage points more or less. In practice, inflation could vary between 2.25% and 5.25%, which would still be within the target. With an index of 10.06%, the BC failed.

And it only gets worse. Financial market and BC projections indicate that noncompliance with the target will be repeated in 2022. The target is 5%. Market projections estimate 7.96%. The BC forecasts 8.8%. The IPCA, the official price index, is at 11.89% in the 12 months through June. For 2023, the inflation target is 1.75% to 4.75%. Experts already think it won’t work.

See in the chart below the targets for the IPCA (the official price index) in recent years and the actual inflation. For 2022 and 2023, projections from the Focus report appear.

Who makes the target? The inflation target for each year is determined by the CMN (National Monetary Council), formed by two representatives from the Ministry of Economy and one from the BC. By setting parameters, the council seeks to avoid price disruption, as seen in the 1980s and 1990s.

How to lower inflation? To try to hold prices down, since March 2021 the BC has been raising the Selic (the basic interest rate), which has jumped from 2% to 13.25% per year so far. With interest rates rising, people are expected to consume less. This, in theory, would lower prices.

Still, economists say the BC will again lose the fight against inflation in 2023.

Why would 2023 already be lost? The government is making expenditures in the election year, such as the creation of truck driver assistance and an increase in Auxílio Brasil and gas vouchers. This is necessary to help people, but it increases consumption and worsens inflation, says Otto Nogami, economist and professor at Insper.

How do taxes influence? According to economist Mauro Schneider, from the economics and policy consultancy MCM, one of the reasons that inflation in 2023 will continue to accelerate was the approval of a project that limits ICMS on fuels to 17% or 18%. This tax reduction was good. But the same law zeroed federal taxes on gasoline and ethanol in 2022, but not in 2023. That helps now, but it will cause inflation to rise next year.

Per What social benefits get in the way? It’s important to give social benefits, but the government’s accounts don’t add up, says Schneider. And that affects inflation as well in 2023.

According to the economist at MCM, the PEC dos Auxílios, currently being processed by the Chamber, contributes to keeping prices high.

The proposal foresees, among other things, the increase of Auxílio Brasil from R$ 400 to R$ 600, the launch of a truck driver assistance of R$ 1,000 and the readjustment of the gas voucher from R$ 53 to R$ 120. measures are valid until the end of 2022, but their consequences go beyond that.

Will Bolsonaro or Lula cut spending in 2023? For José Faria Júnior, director of the consultancy Wagner Investimentos, inflation may even be lower in 2022, due to the reduction of ICMS on fuels and electricity. But the coming year will bring new pressures.

He says that, whoever the president is in 2023, it will hardly be reduced the Auxílio Brasil from R$600 to R$400 or the gas voucher. Then the spending will continue.

Will there be more inflation next year? Faria Júnior expects inflationary pressures coming from the civil service, which did not obtain salary readjustments in 2022, from oil in the international market and from food.

What does the Central Bank say?

In its most recent documents, the BC acknowledged — without specifically citing the PEC dos Auxílios, defended by the Bolsonaro government — that policies that support consumption may pose a risk of rising inflation. The BC also expressed concern about the external scenario.

At the same time, the institution said that some measures under consideration in Congress reduce inflation in the current year, although they raise the indexes for the following years.

O UOL opened space for the BC to comment specifically on this matter. The institution did not comment. In contact with the report, the institution said that it addressed the issues in its public documents.