Brazil Macro | February 2021 - INFLATION DANIEL KARP +55 11 3553-9828
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Brazil Macro | February 2021
INFLATION
DANIEL KARP
daniel.karp@santander.com.br
+55 11 3553-9828INDEX
INDEX
1. Forecasting accountability and perspectives
2. Between supply/costs’ shocks and weak demand
3. Forecasts
4. Risks
2Forecasting
Accountability &
Perspectives
01Forecasting accountability
o Following forecasting best-practices we start the first scenario revision of 2021* making an accountability of our hits and misses
o Right after the start of the pandemic we lowered our forecast to around 1.5% YoY %
Dev. Bps
2020 fcst in Jun-20 2020 realized
for IPCA 2020 and it kept hovering around that value until the end of 3Q20. IPCA 1.5 4.5 303
Then, we started to consistently rise our forecast, so we will analyze what Free prices 1.7 5.2 260
Food-at-home 5.2 18.2 182
pushed this Industrial goods -0.3 3.2 80
Services 1.7 1.8 2
o We use our Jun-20 forecast to check what happened if compared to Dec-20 Administered prices 0.9 2.6 44
→ we had a +303bps surprise
o The biggest surprise was in food at home (+182bps), but the most relevant
one (because it is more related to inflation underlying measures) was in
industrial goods (+80bps)
o Regulated prices were another source of surprise (+44bps) – gasoline was
part of the surprise, but the major one was in electrical energy because of
the determination of Red 2 flag by Aneel (sector regulator) in Dec-20 (despite
the announcement that they would keep Green flag for the whole year).
o Finally, on services prices (also very important to underlying measures, just
as industrial goods), our forecast was correct
4
*Realized at 11-Feb-21Perspectives summary: between supply/cost-related shocks and weak demand
• We believe we missed the upside surprises because 1) we underestimated the power of the supply/cost-related
shocks (commodities, supply chain disruption and BRL depreciation) and 2) the power of the fiscal expansion to
boost demand for goods (income emergency aid that made real wage bill higher the pre-pandemic and a change in
consumer’s basket favoring goods instead of services that were more impacted by the social isolation measures)
• From now on we continue to see supply/cost-related shocks affecting inflation (because of both the continuation of
the shock and still a backlog of adjustments to be done from last year), while the demand is at a very low level and
should recover at a very slow pace (lower boost from emergency income measures, though the economy’s
reopening will help to improve demand)
• We believe the net result of those two forces are inflationary, with supply/cost-related shocks weighing
more than the weak demand, though yet not to the point of jeopardizing medium/long-term BCB’s inflation targets
• Our IPCA inflation forecasts were revised to 3.6% for 2021 on the official scenario revision (11-Feb), but it is already
outdated as our high-frequency tracking is hovering much above it, at 4.6%. We maintained 3.2% for IPCA 2022,
though the balance of risks is clearly tilted to the upside, because of higher inertia from IPCA 2021 and because of
higher fiscal risks.
5Inflation between supply/costs shocks and weak demand 02
Food-at-home inflation: a cooling down process, but landing at a still high level
o Food inflation should reduce, as pass-through to consumers is becoming each time more difficult
o However, the main determinants of food inflation continue to support an upwardly pressured scenario: agricultural commodities
continue to rise and BRL remains depreciated
o Moreover, there is still a backlog of adjustments to be done from the wholesale to the consumer level
CRB Food and inflation of food-at-home (IPCA) Relative price: food-at-home (IPCA)/wholesale agro (IPA-M)
CRB Food R$ t-8 -% YoY (LHS) Relative price forecast Relative price
Food-at-home inflation on IPCA-% YoY (RHS) 0.38
30 50 0.36
25 40 0.34
20 30
0.32
15 20
10 10 0.3
5 0 0.28
0 -10 0.26
-5 -20 0.24
-10 -30
0.22
-15 -40
Nov-15
Dec-03
Dec-16
Jun-10
Sep-13
Jan-18
Feb-06
Apr-08
May-09
Feb-19
Mar-20
Apr-21
Jan-05
Jul-11
Aug-12
Mar-07
Oct-14
Dec-06
Jul-11
Dec-17
Jun-12
Sep-20
May-13
Apr-14
Feb-16
Sep-09
Aug-10
Jan-06
Jan-17
Nov-07
Oct-08
Mar-15
Nov-18
Oct-19
Source: Bloomberg, IBGE, Santander Source: FGV, IBGE, Santander
7Food-at-home: low supply of domestic beef, with high external demand
o The cattle cycle is at the low supply phase
o External demand is very strong and should continue that way
Cattle cycle R$/head Brazilian beef exports to China and Hong Kong
300 BRL inflation adjusted, Live Cattle (LHS)13
120,000
% Cow Slaughter (RHS) 2018 2019 2020 2021 Average15-19
110,000
250 12
100,000
11
200 90,000
Thousands Kg
10 80,000
150
9 70,000
100 60,000
8
50,000
50 7
40,000
0 6 30,000
Mar-04
Sep-14
Sep-20
Sep-02
Sep-05
Sep-08
Sep-11
Sep-17
Mar-07
Mar-10
Mar-13
Mar-16
Mar-19
20,000
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
Source: MBAgro, Cepea, FGV, IBGE, Santander Source: Comexstat, Santander
8Food-at-home: external demand is strong
o The recovery of pork herd in China (after the african swine fever) is demanding considerable amounts of soybean
o At the same time, the China’s proteins deficit continues big, sustaining high levels of imports from other countries, especially Brazil
Soybean R$/bushel China’s deficit of proteins
180
160
140
120
100
80
60
Jan-18
Apr-18
Jan-19
Apr-19
Jan-20
Apr-20
Jan-21
Jul-18
Jul-19
Jul-20
Oct-18
Oct-19
Oct-20
Source: Cepea, Bloomberg
Source: MBAgro, Santander
9Food-at-home: low domestic supply and demand for beef, but high external demand
o Even after the recovery of the pork herd in China, there is a structural change towards higher consumption of beef there
o On the other side, the domestic demand has been reducing and the perspective for 2021 is still weak
o The balance between difficulties in passing-through higher costs to consumers (low domestic demand) and an upward pressure
from external demand seems to still favour an increase in prices or at least a support of the current high level (cattle prices are
trading at historical high levels, so at least some part of the rise should come to consumers)
Beef Consumption Per Capita kg Cattle price R$/@
40.00 7.00 320
Brazil (LHS) China (RHS)
300
39.00 6.50
280
260
38.00 6.00
240
37.00 5.50 220
200
36.00 5.00 180
160
35.00 4.50
140
120
34.00 4.00
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Source: MBAgro, USDA, ONU. Source: Cepea, Bloomberg
10Food-at-home: commodities doesn’t help, but BRL is also an issue
o Last year the main impact came from the BRL
o This year we believe the main pressure will come from commodities, but the BRL should continue depreciated, meaning an average
exchange rate (brl 5.38) higher than last year (brl 5.16) also preventing a higher disinflation in food prices
CRB food in BRL is rising 39% YoY in BRL terms BRL should continue depreciated during 2021
50% CRB Food % YoY BRL %YoY CRB Food BRL %YoY
40%
30%
20%
10%
0%
-10%
-20%
-30% Apr-20
Apr-17
Apr-18
Apr-19
Jan-17
Jan-18
Jan-19
Jul-19
Jan-20
Jan-21
Jul-17
Jul-18
Jul-20
Oct-17
Oct-18
Oct-19
Oct-20
Source: MBAgro, USDA, ONU. Source: BCB, Santander
11Food-at-home: a deceleration to a still high level
o The net result from all those of those drivers points towards a cooling down for food inflation, but still to a high level (from 19% yoy
2020 to 5-6% in 2021)
o Risks are tilted to the upside
Food inflation -- % YoY
IPA-agro IPA-agro fsct
Food-at-home Food-at-home official fsct
70
60
50
40
30
20
10
0
-10
-20
-30
Jan-12
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
12Industrial goods: costs pressuring more than expected
o Commodities rising (metals) and disruption in global supply chain, while demand also helped to pressure (change in consumer
basket+income emergency aid)
o The most relevant upside surprise last year and the biggest revision on our IPCA forecast
Industrial goods inflation - annual
% MM3saar (t+6) % YoY
10
8
6
4
2
0
-2
-4
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jan-20
Jul-20
Jul-21
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-21
Source: IBGE, BCB, Santander
13Industrial goods: commodities rising and disruption of global supply chain
o The recovery of important economies are pressuring commodities prices
o While the supply chain is still affected by pandemic-related noises
The price of freight cost from China is one of the
Iron ore in BRL is at its highest
examples of the supply shocks around the world
1260 2100
China (Export) Containerized Freight Index
1900
1060
1700
860 1500
1300
660
1100
460
900
260 700
500
60
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Jun-13
Jun-16
Jun-18
Jun-11
Jun-12
Jun-14
Jun-15
Jun-17
Jun-19
Jun-20
Jan-18
Apr-18
Apr-20
Jan-19
Apr-19
Jan-20
Jan-21
Jul-18
Jul-19
Jul-20
Oct-18
Oct-19
Oct-20
Source: MBAgro, USDA, ONU. Source: BCB, Santander
14Industrial goods: inventories fell considerably
o Capacity utilization is at its recent highs
Inventories perception is at is lowest Idleness at the industry reduced considerably
Inventories (LHS) 90.00 NAICU NUCI
21
85.00
15
80.00
9
75.00
3 70.00
-3 65.00
-9 60.00
Feb-12
May-20
Feb-09
Feb-15
Feb-18
Feb-21
May-11
May-14
May-17
Aug-10
Aug-13
Aug-16
Aug-19
Nov-09
Nov-12
Nov-15
Nov-18
Feb-11
Dec-08
Jun-02
Jan-10
Jun-15
Apr-13
May-14
Aug-04
Sep-05
Aug-17
Sep-18
Nov-07
Nov-20
Jul-03
Jul-16
Oct-06
Mar-12
Oct-19
Source: FGV, Santander Source: IBGE, Santander
15Industrial goods: companies margins are too compressed
o Companies had already suffered a major exchange rate shock in 2017-2019, but at the time they’ve recently gone by a major margin
adjustment and were able to absorb the shock
o The recent BRL depreciation on top of the last one + rising commodities + supply chain disruption eroded companies margins,
making it impossible for them to not pass-through to consumers some of the shock: note that the emergency income aid also
improved the ability of companies to transmit some of the costs rise to consumers
FX pass-through and Companies’ Operational
FX pass-through and BRL YoY change
Margin
Source: MBAgro, USDA, ONU.
16Industrial goods: an upwardly pressured scenario
o Those upward pressures cited previously should in general keep at place and even if some of the pressures cool down, we believe
there is a backlog of adjustments to continue to be done throughout the year
o On the bright side, a normalization of the consumer basket and the reduction of income aid should alleviate the pressure a bit
o The net result in our view is a mild acceleration to 3.4% yoy in 2021 (from 3.2% in 2020), but risks are tilted to the upside
Industrial goods inflation and forecast - annual
17
Source: MBAgro, USDA, ONU.Services: almost no surprise; should continue a gradual recovery
o Services behaved as expected until now: a major deceleration during the worst phase of the pandemic and now a gradual recovery,
based on the slow reopening of the economy
Services inflation - annual Services core inflation - annual
18Services: the gradual recover is based on a slowly recovering job market
o Services prices are closely linked to unemployment rate, which we believe will reduce at a slow pace, meaning services inflation
should also recover very gradually
o But we made a small upward adjustment due to higher inertia and also some specific cost-related issues (food service)
Services inflation and Unemployment rate Unemployment rate and NAIRU
Unemp. rate t-9 fcst (LHS,inv.) Unemp. rate t-9 (LHS, inv) 15.00
Unemployment NAIRU
Services inflation % YoY fcst Services inflation % YoY 14.00
6 10 13.00
12.00
8 8
11.00
10 6 10.00
12 9.00
4
8.00
14
2 7.00
16
0 6.00
Dec-08
Feb-11
May-14
Jun-02
Nov-07
Jun-15
Apr-13
Aug-04
Sep-05
Aug-17
Sep-18
Jan-10
Jul-03
Jul-16
Oct-06
Mar-12
Oct-19
Dec-08
Dec-19
Jul-13
Jun-14
Apr-16
Sep-22
May-15
Feb-18
Sep-11
Aug-12
Jan-08
Jan-19
Nov-09
Oct-10
Mar-17
Nov-20
Oct-21
19Administered prices: upward pressures, but with downside risks
o There are some repressed adjustments being done throughout 2021 (health insurance, for example)
o Gasoline is an upward pressure, given the global reflation scenario and the depreciated BRL
o Electrical energy prices are also pressured by the BRL, last year’s IGP-M and a difficult hydrology scenario
o However, policy uncertainties on regulated prices could eventually result in lower price adjustments
Gasoline price is higher than pre-pandemic Energy: reservoir levels are below historical average
Avg. International Oct. 87-93
3.25 70 8 years average 2018 2019 2020 2021
International 87 (Gulf)
2.75 Domestic (Petrobras Refineries) 60
2.25 50
% Max. Capacity
1.75 40
1.25 30
gap avg. oct 87/93: +12.1%
0.75 gap 87: +8.6% 20
0.25 10
May-20
Nov-20
Jan-19
May-19
Sep-19
Jan-20
Sep-20
Jan-21
Mar-19
Nov-19
Mar-20
Mar-21
Jul-19
Jul-20
0
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
Source: Bloomberg, Santander
Source: ONS, MCM.
20Forecasts
03IPCA: a risky and longer path towards the target
o We still believe inflation should converge to the target, but it will probably take longer (only in 2022) and the path is riskier
(convergence from top to down, and with many upside risks)
o In 2022 cost-related issues should have ended and the effect of the low demand should be more important to determine inflation; the
effect of the interest rate hike before than expected in 2021 should also act to curb inflation in 2022
o However, the bigger inertia coming from 2021 and the persistence of current shocks are upside risks for our 2022 forecast
2021e old 2021e new 2021e track. 2022e
IPCA 3.0 3.6 4.6 3.2
IPCA inflation forecasts
Free prices 2.9 3.5 4.0 2.8
Food-at-home 5.3 5.1 6.0 2.0 IPCA YoY track. IPCA YoY BCB's target
Industrial goods 2.5 3.4 3.7 2.7 8.0
Jul-21; 7.7
Tradables 2.5 3.4 3.7 2.7
7.0
Non-Tradables 2.5 3.4 3.7 2.7
Services 2.4 3.1 3.4 3.3 6.0 Dec-21; 4.6
Food-service 3.5 5.5 5.4 4.0 5.0 Dec-20; 4.5
Airline tickets 15.0 15.0 24.1 12.0
4.0 Dec-22; 3.2
Economic activity 0.7 1.3 1.9 2.5
Education 5.0 4.0 3.0 6.0 3.0
Inertial 2.0 3.3 3.0 2.0
2.0
Salaries 1.8 2.6 2.4 2.5
Administered prices 3.5 4.0 6.0 4.2 1.0
Gasoline 5.0 6.0 11.9 4.0
0.0
Energy -5.9 -4.2 -0.9 4.0
Sep-21
Sep-20
Sep-22
Nov-21
Jan-20
May-20
Jan-21
May-21
Jan-22
May-22
Mar-20
Nov-20
Mar-21
Mar-22
Nov-22
Jul-20
Jul-21
Jul-22
Health insurance 13.1 13.1 13.1 4.0
Bus fares 6.0 2.6 2.0 4.0
Cores 3.0 3.4 3.5 3.4
Sources: Santander, IBGE, BCB.
Sources: Santander, IBGE, BCB.
22Risks
04Foundations of inflation: fiscal and monetary credibility
o Fiscal responsibility is essential to allow monetary policy to work effectively. It is a necessary condition for monetary credibility
o The central bank credibility “makes disinflation less costly, helps hold down inflation once it is low, makes it easier to defend the
currency when necessary” (Blinder, 1999).
o Credibility also makes the price-formation process more forward-looking, reducing the importance of the backward-looking
component (inertia), so shocks are less likely to have long-lasting effects on inflation
Inflation, Inflation Expectations and Fiscal Inflation, Inflation Expectations and Central Bank
Credibility Credibility
Fiscal Credibility Index (LHS) Central Bank Credibility Index (LHS)
1.2 IPCA % YoY (RHS) 12.0 1.2 12.0
IPCA Expectation % YoY IPCA % YoY (RHS)
1.0 1.0 IPCA Expectation % YoY
12
IPCA: Serviços
10
8
6
4
2
0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
YoY (6 meses de defasagem) Média Móvel 3 meses - MoMsa.
10.0 10.0
0.8 0.8
8.0 8.0
0.6 0.6
6.0 6.0
0.4 0.4
4.0 4.0
0.2 0.2
0.0 2.0 0.0 2.0
Dec-08
Dec-09
Dec-04
Dec-05
Dec-06
Dec-07
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-08
Dec-14
Dec-04
Dec-05
Dec-06
Dec-07
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Sources: IBGE, BCB and De Mendonça and Silva (2016) Sources: IBGE, BCB and De Mendonça and Souza (2007)
24Foundations of inflation: monetary credibility reduces exchange rate pass-through
o Moreover, the negative output gap (being pressured by the long-term fiscal adjustment) also acts to reduce the pass-through,
Exchange-Rate-Pass-Through
Exchange-Rate and Central
Pass-Through and Central Bank
Bank Credibility
Exchange-Rate-Pass-Through and Output Gap
Credibility
12
IPCA: Serviços
10
8
6
4
2
0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
YoY (6 meses de defasagem) Média Móvel 3 meses - MoMsa.
Source: Santander models and De Mendonça and Souza (2007) Source: Santander models
25Henceforth, the main risk we see is a change in the fiscal framework
o The monetary and fiscal credibility are keeping inflation expectations anchored at the target
o Therefore, if there is a change in the current fiscal framework, than inflation expectations (and consequently inflation itself) could
accelerate considerably
Inflation expectations 36-months-ahead are still anchored close to the
long-term target
6.0
5.5
5.0 12
10
8
6
4
2
0
IPCA: Serviços
2011 2012 2013 2014 2015
YoY (6 meses de defasagem)
2016 2017 2018 2019 2020
Média Móvel 3 meses - MoMsa.
4.5
4.0
3.3
3.5
3.0
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
26
Sources: BCB, SantanderBesides the fiscal risk there is also upside risks coming from the usual drivers
o Supply/cost-related shocks, commodities, the reopening of the economy all point towards upside risks for the inflation scenario
o The possible downside risks (which, in our view, have much lower probability) could come from a BRL appreciation or a even
weaker demand scenario or a cooling down in
Balance of risks IPCA 2021* Balance of risks IPCA 2022
5.0
4.0
4.6 3.2
3.0
4.2
downside base upside
downside base upside
Sources: Santander Sources: Santander
*Using the high frequency tracking
27Brazil Macroeconomic Research Team
Thank you.
Obrigada. Ana Paula Vescovi Mauricio Oreng
Chief Economist Head of Research & Strategy
anavescovi@santander.com.br mauricio.oreng@santander.com.br
+55 (11) 3553-8567 +55 (11) 3553-5404
Nosso propósito é contribuir para que
Jankiel Santos Ítalo Franca
as pessoas e as empresas prosperem.
Economist – External Sector Economist – Fiscal Policy
jankiel.santos@santander.com.br italo.franca@santander.com.br
Nossa cultura se baseia na crença de +55 (11) 3012-5726 +55 (11) 3553-5235
que tudo que fazemos deve ser
Tomas Urani Daniel Karp Vasquez
Economist – Global Economics Economist - Inflation
tomas.urani@santander.com.br daniel.karp@santander.com.br
+55 (11) 3553-9520 +55 (11) 3553-9828
Lucas Maynard Felipe Kotinda
Economist – Economic Activity Economist - Credit
lucas.maynard.da.silva@santander.com.br felipe.kotinda@santander.com.br
+55 (11) 3553-7495 +55 (11) 3553-8071
Raissa Freitas Gilmar Lima Gabriel Couto
Business Manager Economist – Modeling Economist – Special Projects
raifreitas@santander.com.br gilmar.lima@santander.com.br gabriel.couto@santander.com.br
+55 (11) 3553-7424 +55 (11) 3553-6327 +55 (11) 3553-8487IMPORTANT DISCLOSURES
This report has been prepared by Santander Investment Securities Inc. ("SIS"; SIS is a subsidiary of Santander Holdings USA, Inc. which is wholly owned by Banco
Santander, S.A. "Santander"), on behalf of itself and its affiliates (collectively, Grupo Santander) and is provided for information purposes only. This document must not be
considered as an offer to sell or a solicitation of an offer to buy any relevant securities (i.e., securities mentioned herein or of the same issuer and/or options, warrants, or
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Kingdom by Banco Santander, S.A., London Branch. Santander London is authorized by the Bank of Spain. This report is not being issued to private customers. SIS,
Santander London and Santander Investment Bolsa are members of Grupo Santander.
ANALYST CERTIFICATION: The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed,
that their recommendations reflect solely and exclusively their personal opinions, and that such opinions were prepared in an independent and autonomous manner,
including as regards the institution to which they are linked, and that they have not received and will not receive direct or indirect compensation in exchange for expressing
specific recommendations or views in this report, since their compensation and the compensation system applying to Grupo Santander and any of its affiliates is not pegged
to the pricing of any of the securities issued by the companies evaluated in the report, or to the income arising from the businesses and financial transactions carried out by
Grupo Santander and any of its affiliates: Daniel Karp*.
*Employed by a non-US affiliate of Santander Investment Securities Inc. and not registered/qualified as a research analyst under FINRA rules, and is not an associated
person of the member firm, and, therefore, may not be subject to the FINRA Rule 2242 and Incorporated NYSE Rule 472 restrictions on communications with a subject
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The information contained herein has been compiled from sources believed to be reliable, but, although all reasonable care has been taken to ensure that the information
contained herein is not untrue or misleading, we make no representation that it is accurate or complete and it should not be relied upon as such. All opinions and estimates
included herein constitute our judgment as at the date of this report and are subject to change without notice.
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© 2021 by Santander Investment Securities Inc. All Rights Reserved.
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