by Camila Moreira
SAO PAULO (Reuters) – Brazil returned to deflation in July for the first time since mid-2020, with the lowest rate since the beginning of the historical series in January 1980, due to falls in fuel and electricity prices thanks to measures government to reduce prices.
In a sign that inflation has already reached its peak, the Broad National Consumer Price Index (IPCA) dropped 0.68% in July, after rising 0.67% in the previous month.
This was the first monthly deflation since May 2020 (-0.38%), according to data released this Tuesday by the Brazilian Institute of Geography and Statistics (IBGE).
The result took the index accumulated in 12 months to a rate of 10.07%, well below the 11.89% of the previous month, but still handily exceeding the ceiling of the official inflation target this year –3.5% , with a margin of plus or minus 1.5 percentage points, a target already abandoned by the Central Bank.
Expectations in a Reuters survey were for a decline of 0.65% in the monthly comparison and a rise of 10.10% in 12 months.
Even with the indication that the worst is over for inflation, the BC last week raised the Selic rate by 0.50 percentage point, to 13.75%.
The drop in the IPCA in July was strongly influenced by the law that sets a ceiling on ICMS rates on the fuel, gas, energy, communications and public transport sectors. Its biggest impact, however, should be restricted to July.
This ensured that the Transport and Housing groups recorded decreases of 4.51% and 1.05% respectively in prices, the only ones with a negative variation in the index for the month.
In July, gasoline prices dropped 15.48% and ethanol prices dropped 11.38%. Electricity bills fell by 5.78%.
Other initiatives promoted by the government to contain inflation involve cuts in import tariff rates, Tax on Industrialized Products (IPI) and PIS/Cofins on fuels.
On the other hand, the biggest increase in the month came from Food and Beverages, with a strong weight in the consumer’s pocket, to 1.30%, from 0.80% in June. The rise in food at home accelerated from 0.63% in June to 1.47% in July, and the biggest positive impact on the month’s index came from long-life milk, which rose 25.46%.
“This increase in the product is mainly due to two factors: first, because we are in the off-season, which goes from March to September, October, … and the fact that production costs are very high”, explained the research manager, Pedro Kislanov.
Although the BC has said that it will assess the need for residual interest rate adjustments at the September meeting, most markets seem to believe that this cycle of monetary tightening has come to an end.
Market expectations for inflation this year have been decreasing thanks to easing in administered prices. But for 2023 the bills are rising as relief measures are not expected to have lasting impacts.
The most recent Focus survey carried out by the BC with specialists shows that the expectation for the IPCA high this year is now 7.11%, and for 2023 it reached 5.36%.
The minutes of last week’s BC meeting, released this morning, also warn that the extension of temporary income support policies could raise country risk premiums and inflation expectations.
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