IPCA-15 of May signals that inflation should stay high for longer, say economists

The deceleration of the IPCA-15 in May does not alleviate expectations for the behavior of prices in the coming months, according to economists interviewed by the CNN . The index registered an increase of 0.59%, from 1.73% in the previous period, but in 12 months the IPCA-15 jumped to 12.2%, above the previous one.

One of the most worrying measures is the reading of core inflation, which removes the most volatile prices from the calculation to capture the strength and trend of the inflationary process.

“For the first time since we started measuring the cores in the bank, the average reached double digits, it is now at 10.17%. This average signals the persistence of the IPCA and our perspective now is that inflation should remain high for a reasonable period”, said Felipe Sichel, chief economist at Banco Modal.

Eight of the nine groups surveyed by the IBGE had a rise in the IPCA-15 in May, a behavior corroborated by the diffusion index calculated by economists to measure the spread of increases in the economy. For Sichel, the diffusion is at 74.93%, very high according to him.

Service prices are back to haunt inflation and were a negative surprise in the May index. The scare came from labor-intensive services and those provided to the automotive sector. Airfares, on the other hand, rose 18.4% and contributed with a rise of 0.9 percentage point in the sector’s prices.

Another sign that alarms economists is the pressure on industrial prices, which rose 1.6% against 0.8% in the previous month, anticipating a pass-through to consumers ahead.

“The well-traced economic activity [com revisões para um crescimento maior do PIB] concerns about services inflation increase, which may show strength in the coming months. The rise in the cores shows a greater persistence of this pressure, a very strong inertia, which helps to confirm our scenario of 10% for this year’s IPCA. There will be no way the BC will stop raising interest rates anytime soon,” said Laiz Carvalho, economist for Brazil at BNP Paribas.

The Selic is at 12.75% per year, with a commitment from the Central Bank to raise the rate again at the next meeting of the Monetary Policy Committee in mid-June. The signals made by Copom members since the last decision at the beginning of the month are of resistance to a continuity in monetary tightening, but it no longer seems a likely scenario.

“This price behavior requires an even more cautious stance from the BC, which means more monetary tightening. We already expect two movements of 0.50 pp, taking the Selic to 13.5%, a level that should remain for a longer time. A scenario that seems likely now is that the convergence of the IPCA to the target will only happen in 2024. There is no doubt about the ability of inflation to converge, but rather a postponement of the time needed for this”, analyzes Sichel, from Modal.