Food, gasoline, electricity bills: why is everything so expensive in Brazil?

Food, gasoline, the electricity bill. Everything is more expensive in Brazil. In August, once again, the country’s official inflation came in above expectations. The Extended Consumer Price Index, the IPCA, measured by the IBGE, accelerated to 9.68% in the accumulated in 12 months, leading to a wave of revisions among economists.

This Monday (9/13), the Central Bank’s Focus Bulletin, which collects estimates from dozens of consultancies and financial institutions, recorded the 23rd consecutive rise in the median projections for the IPCA at the end of 2021, which now stands at 8 %.

Widespread price increases are a product of different causes, many of them combined. BBC News Brasil explores some through the trajectory of the three elements that have been pushing inflation the most in recent months: fuels, food and electricity.

The Gasoline Cascade Effect

The average price of regular gasoline in the country reached R$ 6 in the week to September 11, according to the most recent data from the National Petroleum Agency (ANP). The maximum price, still according to the base, goes from R$7 in some places.

Fuel prices in Brazil follow the behavior of prices abroad. Since 2016, the Petrobras is guided by the International Parity Price (PPI), which takes into account the price of a barrel of oil and the exchange rate. Thus, these two factors explain a good part of the increase in fuel prices in recent months.

The price of a barrel of oil has been on a strong bullish streak since the beginning of this year. On the one hand, due to the greater demand, after the opening of many countries that started vaccinating against covid. On the other, due to the very dynamics of the Organization of Petroleum Producing Countries (OPEC).

It concentrates around 40% of global production of the commodity and sometimes holds stocks to increase the value of the barrel. In July, the organization announced that it would gradually expand the offer again, given the significant growth in prices this year.

As the quotation is made in the US currency, the dollar also has a direct impact — and the real continues to lose value.

The question of the dollar is a separate chapter, which has even confused economists in recent months, as recently portrayed by BBC News Brasil.

In short, the strong devaluation of the real reflects external factors, such as the expected growth in the United States and higher interest rates in the country, but also the strong internal instability that Brazil is going through.

the president’s conflicts Jair Bolsonaro with the other powers and the anticipation of the debate on the 2022 elections have contributed to building an environment of uncertainty that keeps investors away, who prefer to take their dollars to safer markets.

Back to fuels, the impact of the increase goes far beyond who needs to fill the tank. The ripple effect puts pressure on costs such as public transport and freight, impacting the prices of a myriad of products.

Salt bill also at the supermarket

Including food prices, which have also been on an upward trajectory for months.

In this case, once again the dollar influences, and with a double effect. As agricultural commodities — corn, sugar, meat, coffee, wheat, orange — are quoted in dollars, whenever they rise, their price in reais tends to rise as well.

In parallel, the high dollar encourages the producer to export instead of selling to the domestic market. This reduces domestic supply and also helps push prices up.

In addition to the two factors, there is another factor that has contributed to reducing the domestic availability of food: the historic drought that affected the Southeast and the Midwest.

The lack of rain caused crop failure in important producing regions and affected the cultivation of coffee, oranges, corn, soybeans, sugar, as explained by the manager of Agro consulting at Itaú BBA, Guilherme Bellotti.

Corn and soybeans, for example, have a kind of chain effect. They are raw material for the feed used in the poultry, pork and beef industry — that is, they also put pressure on the price of meat.

Sugar, in turn, is the raw material for the production of ethanol — which is also used in the composition of gasoline sold at gas stations.

more expensive and scarcer

In addition to food, drought also helps to explain the increase in electricity. With the reduction of reservoir levels in important hydroelectric plants this year, it was necessary to activate thermoelectric plants, powered by natural gas, diesel oil, biomass and coal, to compensate for the reduced supply of hydroelectric plants and, more recently, to import energy from neighbors such as Argentina and Uruguay.

Thermoelectric energy is not only more polluting, it is also more expensive, hence the reason why the energy bill has come with an additional, the water scarcity flag, announced by the government on August 31st.

Until then, the highest value predicted by the tariff flag system was the level 2 red flag, which was in effect. The water scarcity flag will be charged at least until April of next year, adding R$14.20 to electricity bills for every 100kW/h consumed. The value is about 49% higher than the level 2 red flag, which provided for an extra payment of R$ 9.49 per 100kW/h.

In parallel, the critical situation of the reservoirs sparked a debate about the risks of blackouts and rationing — and the government’s delay in reacting.

Since May, when the rain restriction scenario began to become clearer, the Minister of Mines and Energy, Bento Albuquerque, has repeated that there is no possibility of blackouts and rationing in the country. At the end of August, when the most expensive flag was announced, the government launched a program to voluntarily reduce energy consumption.

Days before, the National Electric System Operator (ONS) had informed that, as of October, generation would be insufficient to meet demand, and it would be necessary to increase the level of imports and activation of thermal plants to avoid blackouts.

More inflation, less growth

Unlike other inflationary cycles that Brazil has gone through, this one is not driven by a rise in demand by Brazilians, but by shocks on the supply side — drought, the dollar, oil, etc.

Generally speaking, shocks cause a temporary price increase and dissipate. This time, however, they have been persistent and have been contaminating other prices, as noted by the chief economist of Banco Fator, José Francisco Lima Gonçalves. In a report sent to clients, he assesses that inflation, which until the beginning of the pandemic had been on a benign trajectory, “has changed levels”.

As a result, the Central Bank has increasingly tightened interest rates. The higher Selic raises the cost of credit and helps to further reduce demand and slow down the economy.

That’s why, in parallel with revised estimates for inflation, economists are also revising their 2022 GDP (Gross Domestic Product) forecasts downwards. 5% to 0.9%; Itaú, from 1.5% to 0.5% and XP, from 1.7% to 1.3%.

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