If Central Bank
forecasts are right, inflation will fall below the target of 4.5% in the
middle of this year, something that hasn’t happened since 2009. It will
be a temporary fluctuation of the price index, absolutely normal in
inflation-targeting regimes, but enough to fuel accusations of monetary
policymaking overreach.
According to forecasts presented by the Central Bank’s Monetary Policy Committee (Copom) in the December Inflation Report, the Extended Consumer Price Index (IPCA) could reach 4.1% in the 12-month period ending in September. By the end of the year, inflation will rise to 4.7%.
If the Central Bank (BC) reviewed its calculations today, it probably would find an even lower percentage with some chances of dropping below 4%. This happens because the Inflation Report was finished before the BC became aware of December’s inflation data, which tends to be better than expected according to a kind of preview of the indicator, IPCA-15, which measures price variations in the 30-day period through the 15 of each month.
Inflation may fall below 4.5% as early as in the second quarter, since the IPCA forecast by the BC for the 12-month period ending in June is 4.6%. All of the BC's projections already take into account the market’s expected interest-rate cuts for December, which would take the Selic to 10.5% in 2017.
Inflation would tend to be lower exactly in the period when the National Monetary Council (CMN) will confirm the 4.5% target for 2018 and set the one for 2019. It could provide more ammunition for some economists who believe the target should be reduced.
Market analysts also expect inflation to temporarily fall below the target in the middle of this year. According to the forecasts of over 100 private-sector economists surveyed and consolidated by the BC in the Focus bulletin, the accumulated IPCA in 12 months should reach its lowest level in August at 4.05%. It would climb again in the following months and end 2017 at 4.87%.
The temporary drop in inflation below the target in the middle of 2017 is due exclusively to positive surprises in consumer price indices in the last quarter of 2016.
Inflation ended last year lower than expected because food prices had an atypical evolution. They rose a lot in the third quarter, when they usually have a more favorable evolution, and started falling closer to the year’s end when prices usually climb a bit more.
The temporary drop in inflation in the middle of the year doesn’t mean a violation of the targeting regime. First, because the 4.5% target is valid for the calendar year. Second, because the regime includes a tolerance range exactly to accommodate such surprises, which are the so-called supply shocks.
Still, judging from recent history, the temporary fluctuation of the IPCA below the target should reinforce the arguments of those who think the BC tightened monetary conditions too much. The last time inflation fell below 4.5%, in 2009, the BC was accused of taking too long to cut rates in response to the global financial crisis triggered by the collapse of Lehman Brothers.
Inflation also fell below 4.5% a decade ago, ending 2006 at 3.14%. The price indices fell largely because of a strong drop in food prices and the real’s strengthening as the international scenario improved. Some economists, however, say it would be a development of the excessively hawkish team of then-BC President Henrique Meirelles, which included economist Afonso Bevilaqua.
Despite the criticism, the inflation-targeting regime commonly features fluctuations over and below the target. Supply shocks usually are behind them, like favorable crops lowering food prices or an unexpected decline in fuel prices.
But in Brazil inflation mostly was above the midpoint target, especially during the term of BC ex-President Alexandre Tombini, leading many to say the target’s midpoint was actually the floor.
Below-target inflation could encourage the idea that Brazil is ready for more ambitious targets, but it’s not quite true. In case inflation fluctuates around 4.5%, the Copom actually will be restoring the midpoint target. Further lowering it would demand an additional monetary-policy effort, which would tend to decline if the BC rescues its credibility after keeping inflation on target for some time.
Still, a current inflation below 4.5% could help the BC since Brazilian expectations are strongly influenced by current inflation.
According to forecasts presented by the Central Bank’s Monetary Policy Committee (Copom) in the December Inflation Report, the Extended Consumer Price Index (IPCA) could reach 4.1% in the 12-month period ending in September. By the end of the year, inflation will rise to 4.7%.
If the Central Bank (BC) reviewed its calculations today, it probably would find an even lower percentage with some chances of dropping below 4%. This happens because the Inflation Report was finished before the BC became aware of December’s inflation data, which tends to be better than expected according to a kind of preview of the indicator, IPCA-15, which measures price variations in the 30-day period through the 15 of each month.
Inflation may fall below 4.5% as early as in the second quarter, since the IPCA forecast by the BC for the 12-month period ending in June is 4.6%. All of the BC's projections already take into account the market’s expected interest-rate cuts for December, which would take the Selic to 10.5% in 2017.
Inflation would tend to be lower exactly in the period when the National Monetary Council (CMN) will confirm the 4.5% target for 2018 and set the one for 2019. It could provide more ammunition for some economists who believe the target should be reduced.
Market analysts also expect inflation to temporarily fall below the target in the middle of this year. According to the forecasts of over 100 private-sector economists surveyed and consolidated by the BC in the Focus bulletin, the accumulated IPCA in 12 months should reach its lowest level in August at 4.05%. It would climb again in the following months and end 2017 at 4.87%.
The temporary drop in inflation below the target in the middle of 2017 is due exclusively to positive surprises in consumer price indices in the last quarter of 2016.
Inflation ended last year lower than expected because food prices had an atypical evolution. They rose a lot in the third quarter, when they usually have a more favorable evolution, and started falling closer to the year’s end when prices usually climb a bit more.
The temporary drop in inflation in the middle of the year doesn’t mean a violation of the targeting regime. First, because the 4.5% target is valid for the calendar year. Second, because the regime includes a tolerance range exactly to accommodate such surprises, which are the so-called supply shocks.
Still, judging from recent history, the temporary fluctuation of the IPCA below the target should reinforce the arguments of those who think the BC tightened monetary conditions too much. The last time inflation fell below 4.5%, in 2009, the BC was accused of taking too long to cut rates in response to the global financial crisis triggered by the collapse of Lehman Brothers.
Inflation also fell below 4.5% a decade ago, ending 2006 at 3.14%. The price indices fell largely because of a strong drop in food prices and the real’s strengthening as the international scenario improved. Some economists, however, say it would be a development of the excessively hawkish team of then-BC President Henrique Meirelles, which included economist Afonso Bevilaqua.
Despite the criticism, the inflation-targeting regime commonly features fluctuations over and below the target. Supply shocks usually are behind them, like favorable crops lowering food prices or an unexpected decline in fuel prices.
But in Brazil inflation mostly was above the midpoint target, especially during the term of BC ex-President Alexandre Tombini, leading many to say the target’s midpoint was actually the floor.
Below-target inflation could encourage the idea that Brazil is ready for more ambitious targets, but it’s not quite true. In case inflation fluctuates around 4.5%, the Copom actually will be restoring the midpoint target. Further lowering it would demand an additional monetary-policy effort, which would tend to decline if the BC rescues its credibility after keeping inflation on target for some time.
Still, a current inflation below 4.5% could help the BC since Brazilian expectations are strongly influenced by current inflation.
valor.com.br By Alex Ribeiro | Brasília
