Increasing fuel prices amid the surge in oil on the international market contaminates the entire Brazilian economic chain; Forecasts point to the goal ceiling burst for the second year in a row
The mega-increase in fuel prices announced by Petrobras last week led to a wave of upward revisions to expectations for the inflation in 2022. The impact of the rise in gasoline (18.8%), diesel (24.9%) and cooking gas (16.1%) should spread throughout the Brazilian economic chain and put pressure on the price of several products, mainly food and services, with strength concentrated in transport. The propulsion in response to the war in Ukraine makes analysts see the Broad Consumer Price Index (IPCA) above 7% at the end of this year — more than double the 3.5% target pursued by the Central Bank (BC), with limits between 2% and 5%. If it materializes, it will be the second consecutive year that the monetary authority bursts the ceiling. In 2021, inflation ended at 10.06%, the highest level in six years.
In addition to the immediate effects at the pumps, which are already showing a value above R$ 7 per liter of gasoline, Brazil’s high dependence on road transport will lead to a rise in several other sectors. The cascading effect made the coordinator of the Price Index of Fundação Getulio Vargas (FGV), André Braz, raise the expectation with inflation to 7.1% at the end of this year. Although the measures approved by the Legislature to lower the price at gas stations indicate some relief, the economist points out a series of other oil-derived products that will not be impacted by the tax reduction or the bonuses distributed by the government. “We have plastic packaging, automobile resins, the part of pipes and connections in civil construction, the fertilizers used in agribusiness. It’s a huge amount of products that are going to get more expensive for consumers,” he says.
Along the same lines, the Credit Suisse bank revised its expectation with inflation from 6.2% to 7%. In a note, the European institution emphasizes that the new level considers the transfer to consumers of only a portion of the readjustment practiced in the refineries. If the account is transferred in full, the projection points to an increase of 7.8%. Bank of America (BofA) also raised the estimate from 5% to 6.5%, citing the pressures generated by the increase in commodities, especially energy and agriculture. Brazilian analysts predict the IPCA at 5.65%, according to Boletim Focus, a weekly survey by the BC with more than a hundred institutions. The level has been revised in eight consecutive weeks and should be changed again in the edition of next Monday, 14.
The increase in barrel of oil it is one of the main economic consequences of the conflict in Eastern Europe. The fear of shortages with the embargo of the United States, United Kingdom and European Union to Russia made the price of the commodity soar in the international market and touch US$ 140 at the beginning of last week. The value cooled in the following days with the information that other countries were able to supply the blocked demand of the Russians, and the price dropped to US$ 110. The conflict, however, only gave more strength to a movement that was already on the radar. of economists. After hitting the lows between 2020 and 2021 because of economic stagnation due to the new coronavirus pandemic, the sector went up with the reheating of activities around the globe. The lack of clarity generated by the war does not allow to see the path that the market will take, but none of the clues indicate that the price should be below the triple digits anytime soon.
Inflation was 10.54% accumulated in 12 months in February, according to data released on Friday, 11th, by the Brazilian Institute of Geography and Statistics (IBGE). The price variation rose 1.01% in the month, the highest level for the period in seven years. The generalized spread of the increase in the price of a liter of fuel over the economic chain was evidenced by the 75% increase in the diffusion index, that is, the share of products surveyed that had a positive variation in the month.” Undoubtedly, this is the result of the transfer of the Gasoline. Even though fuels registered a decline in February, the transfer was being made gradually throughout the chain”, says the chief economist at Necton Investimentos, André Perfeito.
In an effort to bring inflation to the target, the Monetary Policy Committee (Copom) raised the basic interest rate from 9.25% to 10.75% per year in February. It was the third increase followed by 1.5 percentage points in the Selic. The Central Bank left a new high contracted at next week’s meeting, despite admitting a slowdown in the tightening. The financial market estimates the Selic to be at 12.25% per year, but the recent pressure from the conflict in Eastern Europe makes some analysts see interest rates at 14% per year. The rise in interest rates harms economic activities as the rate is used as a basis for financing and loans.