Why inflation soared
“As economic activities reopened, wages recovered and demand returned to previous levels, the high monetary issue fueled a new acceleration of the inflationary process, hand in hand with an increase in financial dollars. In this way , inflation went from the 2% zone between April and July 2020 to 3.6% in the last quarter of the year. Worse still, at the beginning of 2021 inflation continued to accelerate, reaching an average of 4.1% in the first quarter of the year (with a peak in March, where it climbed 4.8%), “said Ecolatina.
In response to the increase in inflation, the government implemented a strategy: to increase the price of the official dollar below the rest of the prices. At the same time, it postponed the increase in utility rates and reduced the increases in regulated prices. Lastly, it slowed down the pace of monetary issuance and tightened controls to contain financial exchange rates.
However, this strategy was not enough: “the inertia fueled by the issuance of money in 2020, with a high exchange rate gap and a lot of ground to be recovered by workers and entrepreneurs in items hit by the quarantine, together with the expectation of pending corrections at the end of the year, made the decline difficult of inflation “explained the consultant.
The Maximum Prices program to contain the price increases at the beginning of the pandemic, was extended and delayed the rise of these products, remaining 15 pp below inflation in 2020. “The disarmament of the program (completed in June) accelerated the prices of this group of products, which went from showing an inflation of less than 1% in the months of full freeze to averaging increases of almost 4% between April and September of this year. These goods have a relatively important weight on the general basket (almost a fifth of the index) and contributed to a slower deceleration than expected, “he added.
Despite the measures taken, the inflationary “truce” was brief and EColatina estimates that October inflation will once again be around 3%.
Supply warning
This week the government announced a freeze on the prices of staple foods. The program was launched by the Secretary of Commerce and will apply to 1200 products. For Ecolatina, the program is similar to Maximum Prices “This type of policy can temporarily contain the inflation of a group of goods in the short term, but it loses effectiveness as the months go by.“.
“The rise in costs of the production companies, which cannot transfer to the consumer, sooner or later leads to shortages, evasion strategies from the program or directly, non-compliance. Thus, without an accompaniment of the rest of the economic policy (which allows to shore up the transitory stability and its potential effect on expectations with a correction of underlying imbalances) the only effect of these policies ends up being that of postpone unavoidable rises. To make matters worse, the prices of many of these products were already behind due to the space given in the previous freeze, so the effectiveness of the program could be compromised by this additional factor, “they argued.
Concern for 2022
In the draft National Budget for 2022, the Government postulated that it expects an inflation of 33% for the coming year. A price increase of this magnitude would require that the exchange rate system remains unchanged and the dollar continues to run below the CPI. However, next year the normalization of the flow of international tourism and the prices of commodities with downward risk will play an important role, so “it is probable that the current rate of monthly appreciation cannot be maintained.”
To meet the budgeted goal, monthly inflation for 2022 should be below the lowest figure for this year (2.5%), the consultancy estimated and they warn that these projections “they have serious risks of not being able to be fulfilled “.
Finally, international inflation is on the rise (in Brazil it has already exceeded 10%, while in the United States and Europe it is at lower values, but the highest in a decade), a factor that does not help to contain prices either. domestic.
“Definitely, the current trend does not look optimistic. Although the announced controls may have positive effects in the short term, in the same way as rate or exchange rate freezes, they themselves carry the guarantee of a subsequent increase. If this increase did occur in 2022, the Budget guidelines could be underestimated again, “concluded Ecolatina.
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