Food prices put pressure on inflation again in Brazil

The IPCA (Broad National Consumer Price Index) rose 0,44% in September compared to August, accumulating a rise of 3,71% in 2024. The result frustrated some expectations, especially after the 0,02% deflation observed in August, undermining the possibility of the Central Bank continuing to reduce the basic interest rate (Selic). As a result, the IPCA accumulated in 12 months resumed its upward trend, reaching 4,42%, approaching the ceiling of the inflation target for the year, which is 4,5%.

The result observed in September was mainly influenced by two of the nine groups that make up the IPCA calculation: “housing”, which recorded the highest increase, of 1,8%, impacted mainly by the electricity bill, which rose 5,36% compared to August; and “food and beverages”, which showed an increase of 0,5%. In both cases, the effects of the drought recorded this year are noticeable, which put pressure on the prices of these items.

Focusing specifically on food, this year’s prolonged droughts and fires have reduced crop production and productivity, in addition to affecting the quality of products offered to the end consumer. While supply is limited by these factors, Brazil has seen an increase in household consumption — up 1,3% in the second quarter of 2024 compared to the first quarter of 2024, and up 4,9% compared to the same period in 2023, according to data from IBGE. This combination of restricted supply and increased demand results in higher food inflation.

 In terms of household food, the increases recorded in the prices of coffee (ground), beans (black), meat, fruit and oils and fats stand out, with increases in September compared to August of 4,02%, 3,52%, 2,97%, 2,79% and 2,21%, respectively.

In the case of coffee, the increase in prices can be explained by the severe water shortage. The long period without rain has harmed the current harvest, both of Arabica and Conillon coffee, which, combined with the low global availability of the product, has put even more pressure on prices.

In the case of meat, after price drops throughout 2023 and the first half of 2024, a positive trend has been observed in recent months, with an accumulated increase of 3,51% between August and September alone. In the first half of this year, the increase in the number of slaughters increased supply, leading to a reduction in protein prices. However, with the increase in the number of municipalities experiencing extreme drought conditions, from 201 in August to 216 in September, the weight gain of animals has been affected, delaying slaughters and putting pressure on prices. Additionally, the growth in exports of fresh meat between January and September of this year increased by 30% compared to the same period of the previous year, which reduced domestic supply, contributing to the increase in prices. Market expectations indicate that beef inflation could accumulate around 8% by the end of the year.

The drought also had a significant impact on fruit prices, especially citrus fruits. Lemons saw a significant increase of 30,4%, while oranges rose by 10%. The lack of rain reduced the supply of lemons in the field and compromised the quality of the product, leading to the cancellation of some exports. In the case of oranges, in addition to the drought and high temperatures, prices were pressured by the incidence of “greening”, a disease that affects both the quality and productivity of the fruit. Oranges, in particular, reached historic prices due to the combination of limited supply and high demand.

Another group that saw a strong increase was oils and fats, with soybean oil standing out. According to Cepea/Esalq, soybean oil exports have remained strong, and it is the only product in the Brazilian soybean complex that has seen its foreign sales increase compared to last year. Strong external demand, combined with a possible substitution effect caused by the increase in olive oil prices since the beginning of the year, boosted domestic demand for soybean oil, exceeding the available supply. As a result, inflation for the product rose by 3,53% in September.

Given this general scenario of rising prices, the inflation expectation for the end of the year in Brazil rose to 4,4%, according to the Focus Bulletin released this Monday, October 14, a value close to the target ceiling of 4,5%. However, there is a consensus in the market that it will be very difficult to contain the index below this ceiling, which may force the Central Bank to continue increasing the basic interest rate, resulting in a slowdown in the country's economic activity. However, for the next harvest, better results are expected on the agricultural side. According to Conab's first estimates for the 2024/25 grain harvest, a record production is projected, with an increase of 8,3% compared to the 2023/24 harvest. For important products in the Brazilian basic food basket, such as rice and beans, Conab estimates growth of 13,8% and 0,5% in production, respectively. If this scenario materializes, there may be some relief in food prices due to the increase in supply.

References and Recommended Reading:

CARREGOSA, Lais. ANEEL activates red tariff flag 2 for October; electricity bill becomes more expensive. G1 - Globo, October 4, 2024. Economy. Available at: Aneel activates red tariff flag 2 for October; electricity bill becomes more expensive | Economy | G1 (globo.com). Accessed on: 15 Oct. 2024.

AMORIM, Daniela; MENDES, Daniel Tozzi. Inflation accelerates and stands at 0,44%, driven by electricity and food bills; in 12 months, IPCA reaches 4,42%. Estadão, October 15, 2024. Economy. Available at: Inflation accelerates and stands at 0,44%, driven by electricity and food bills; in 12 months, IPCA reaches 4,42% - Estadão (estadao.com.br). Accessed on: 15 Oct. 2024.

DINIZ, Ana Carolina. Meat inflation could reach twice the general index in 2024. G1 - Globo, October 12, 2024. Agribusiness. Available at: Meat inflation could reach twice the general index in 2024 (globo.com). Accessed on: 15 Oct. 2024.

BRAZILIAN INSTITUTE OF GEOGRAPHY AND STATISTICS (IBGE). Municipal agricultural production: temporary and permanent crops. Accessed on: 16 Oct. 2024.

October will have a red tariff flag level 2. National Electric Energy Agency, October 1, 2024. News. Available at: October will have a red tariff flag level 2 — National Electric Energy Agency (www.gov.br). Accessed on: 15 Oct. 2024.

Lemon prices soar 30%; see other foods that became more expensive in September due to the drought. G1 - Globo, September 30, 2024. Agribusiness. Available at: Lemon prices soar 30%; see other foods that became more expensive in September due to the drought | Agribusiness | G1 (globo.com). Accessed on: 15 Oct. 2024.

QUINTINO, Larissa. Market revises inflation projection again, which flirts with the target ceiling. Veja, October 14, 2024. Economy. Accessed on: 15 Oct. 2024.

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