With states announcing the reduction of the ICMS rate on gasoline and electricity — after the federal government zeroed PIS/Cofins on gasoline and ethanol — economists began to review their inflation forecasts. Some institutions expect, for the year, an IPCA (Broad Consumer Price Index) up to 1.5 percentage points lower than projected. For 2023, however, estimates are expected to increase due to the return of PIS/Cofins collection from January.
Santander’s preliminary calculations, for example, show that the IPCA should be close to 8% in 2022 and 5.7% in 2023. Before, the bank estimated that it would be 9.5% and 5.3%, respectively. Itaú Unibanco, on the other hand, revised its 2022 figure from 8.7% to 7.5%.
The price index coordinator at FGV (Fundação Getulio Vargas), André Braz, also reduced his estimate from 9.2% to 8.5%. Sergio Vale, chief economist at MB Associados consultancy, for the time being, speaks of 8.7% for this year, but thinks “it could be less”.
The biggest impact of the ICMS reduction should be observed in July, a month that can register deflation. According to Daniel Karp, from Santander, in comparison with June, the IPCA may fall by up to 1% in the month if all states end up reducing the tax rate.
The economist considers that about 75% of the tax cut will reach the final consumer. The trend, he explains, is for the population to spend what they save on fuel on other items. “This tax cut ends up being a fiscal stimulus that can sustain demand, which was already surprising positively.” If there were no such stimulus in demand, the tax reduction could make inflation reach 7%, says Karp.
For Sergio Vale, however, the big surprise in this year’s inflation should come more from the price of food than from the value of fuel and energy. “The crops are doing well. There are signs that this could help with inflation.”
If the tax cut alleviates inflation this year, the change should mean a rise in 2023. When the federal government zeroed PIS and Cofins on ethanol and gasoline, Itaú Unibanco already raised its estimate for the IPCA next year from 4.2% to 5.6%.
The review was made because the collection of taxes will resume from January, pushing prices up again, and also because of the feeling that inflation was already more widespread in the economy.
For the chief economist at MB Associados, Sergio Vale, inflation next year “is on course to be between 5% and 6%”. “In the short term, there may be a decline in inflation. But I have difficulty knowing whether this fall will not be limited due to the exchange rate scenario.”
Vale’s concern is that the decrease in revenue will trigger greater market distrust regarding the government’s ability to pay its debts. This could cause part of the investors to leave Brazil, devaluing the real against the dollar – which would put pressure on inflation.
The economist also says that the fiscal situation should remain under control this year, given that the collection is on the rise due to the increase in the price of commodities. The obstacle may come in 2023, as the forecast is that the world economy will start to slow down, causing the price of commodities to fall – and reduce collection as well.
“The most complicated thing is that you are cutting something [o ICMS] permanently. Then, next year, the rate will be lower on top of a lower collection as well. This puts weight on the fiscal situation,” says Vale.
For economist Daniel Karp, from Santander, it is still difficult to calculate how the fiscal issue will interfere with inflation, given that the international scenario can also change the exchange rate. In the view of economist André Braz, from FGV, “any measure that does not last for 2023 ends up imposing higher inflation next year”.
Braz highlights that global uncertainties may also pressure prices in 2023, as has already occurred this year. He recalls that, at the beginning of 2022, economists were optimistic about inflation and did not imagine that it could reach close to 10%. The war in Ukraine, however, took oil prices and inflation to another level. “This could be repeated next year, depending on the unfolding of these sources of uncertainty and how this fiscal issue will turn out.”