What’s deflation, recorded in August, and what’s the impression on the economic system
- September 12, 2022
- No Comment
Brazil had new deflation in August, of 0.36%, after also registering a fall in July, of 0.68%. The data were taken from the IPCA (Broad Consumer Price Index), the official inflation in the country, released this Friday (9) by the IBGE (Brazilian Institute of Geography and Statistics).
What is deflation? It is negative inflation, which signals an average drop in prices — in August, it was reduced mainly by the transport group, which includes fuel and airline tickets. On the other hand, seven of the nine areas surveyed by the IBGE had a rise in August. Among them, food and beverages, which continue to register price increases.
Deflation is good news for the consumer’s pocket, who pays less for some products — in the case of fuel, the reduction in prices in this group could have an impact on other sectors in the future.
Inflation is a point that has been worrying in Brazil because of the continuous rise. Values remain high, but the rise is slowing. In 12 months (from August 2021 to August 2022), the accumulated is 8.73%. Considering only this year (from January to August), inflation is 4.39%.
What made inflation fall? The drop in the IPCA was mainly driven by the reduction in fuel prices (-10.82%).
The slowdown was expected after Petrobras announced price reductions at distributors.
In addition, since June, there has been a reduction in ICMS on essential services, such as electricity, communications and fuel.
Is there a problem when there is deflation? In the current moment of the Brazilian economy, deflation is welcome, as it gives relief to consumers, improves purchasing power and stimulates consumption.
Negative inflation can only be a risk if it lasts a long time, for a full year, for example. There it has the opposite effect.
Industries may stop producing because the selling price is not what they want. This causes unemployment (because of reduced production) and the economy comes to a halt.
This could turn into a vicious cycle. With more layoffs, consumption is further reduced, and industries end up cutting production again. It’s a domino effect.
But is it better to have inflation then? The ideal is to have low, reasonably stable but positive inflation. That magic number would be in the range of 2% to 3% per year.
Why is consumer inflation different from the official one? Inflation indices are used to measure the variation in prices and the impact on the population’s cost of living.
The inflation that people feel in their pockets can be higher or lower than the official index. This is normal and does not mean that the official data is falsified.
Hundreds of products: The general index is calculated based on a basket of products (such as tomatoes, soap and cell phones, for example) and services. The index baskets are formed from surveys. The IPCA and INPC, for example, derive from the POF (Family Budget Survey), carried out by the IBGE, but each index gives its own weight to these items.
Each item in this list has a relative weight in the overall index. If the price of tomatoes goes up by 50%, the consumer pays that, but the general inflation will not be 50%, because tomatoes have a certain influence in the basket, but there are many other products to consider in this account.
It’s a combination of that that makes it to the index. Each person consumes a different amount, type and brand of each product. So the calculation is complex.
Different indices: These products and their weight vary according to the income bracket of the population. Therefore, there are different rates of inflation.
The most cited is the IPCA (Broad Consumer Price Index), used as “official” by the government. When it is said that the inflation target is being met or has burst, this index is referred to.
But there are many others, such as INPC, IPC-Fipe, IPC-S and IGP-M.
Each index has a different methodology, and the measurement is carried out by several specialized bodies, such as IBGE, FGV and Fipe (Fundação Instituto de Pesquisas Econômicas).
Among the differences in method are the days on which the indices are calculated, the products they include, their weight in the general composition and the range of population studied.