Interest, fuel and food; what has made inflation fall, according to analysts

On Monday (22), financial market institutions reduced their forecast for inflation in 2023, the first drop being presented in the Focus Bulletin. Experts believe that the review is a result of the Central Bank’s monetary policy, by raising interest rates and the prospects of a slowdown in the global economy, which reduces demand.

For Gesner Oliveira, professor of economics at FGV, the result was possible due to three factors: the drop in fuel prices, food prices showing a decline and due to the actions taken by the BC.

“We always need to link to the fact that we have the autonomy of the BC and that it will continue regardless of the results of the elections, so unlike other changes in government, we have no doubt as to who will be the president, he is already there and his policy will continue. The second element was the specific actions in relation to what has weight in the indices, which is the price of gasoline and the price of diesel. And, finally, we have food in a downturn, whether domestic – due to the results of the grain crops that are positive – and internationally – with the reestablishment of the grain trade route”, he explains.

According to Oliveira, in 2023, inflation should behave in accordance with the credibility of the new government’s economic policy.

“Monetary policy has this more stable expectation, but we have fragile fiscal accounts and there is doubt as to what the corrective policy will be in relation to fiscal guidelines and whether, indeed, a more solid macroeconomic balance will be pursued. If the new government gives this indication – that it will pursue a balance of fiscal guidelines -, we can see a continuation of the deceleration and it will be possible to create the conditions for a return to the range of the inflation target in 2024”.

For the chief economist of MB Associados and CNN Specialist in economics, Sergio Vale, the drop in the inflation estimate for 2023 is positive, but it is linked to weaker economic activity in Brazil and in the world. “In large part it is linked to the further weakening of the economy. Weaker demand helps to decompress inflation.”

In addition, Vale considers that the numbers presented by the Focus report also show that the Central Bank has acted correctly in relation to monetary policy measures.

“In conjunction with high interest rates, what was expected was that expectations would actually begin to subside. It’s a good sign that BC is on the right path indeed. Important will be for 2024 expectations to start to sag as well,” he said.

Nicola Tingas chief economist at Acrefi assesses that the drop in the exchange rate and in oil prices are also factors that contribute to the drop in inflation projections for next year.

“It is an adjustment of a number that had been going up. This effect is already a recognition of the accommodation of factors such as the exchange rate, fuel prices that will help a little for next year, so it is already a technical adjustment. But slowing global and local activity, high interest rates and tight monetary policy are creating revisions for the year ahead.”

Regarding a possible continuity of reductions for inflation, Tingas assesses that the most likely scenario for 2022 is an inflation of 6.5%. However, the economist points out that the result depends on stability in the domestic and global scenario.

“Subject to no surprises like the exchange rate, oil, food, in a new round of war. Supply effects can create pressures that can change these projections. Demand pressures, on the other hand, help to confirm this assumption of falling inflation”.

According to the Focus Bulletin, the inflation expectation for 2022 had the eighth consecutive drop and reached 6.82%. Previously, the projection was 7.02%.