Brazil Economic Weekly

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1 Macroeconomic Research Department Macroeconomic Research Department Brazil Economic Weekly November 6 th 2015 Inflation rate this year is even higher for the elderly and low-income families Myriã Tatiany Neves Bast The inflation in 2015 already exceeded the rate of 9% in diverse consumer price indexes. Without a doubt, all consumers are suffering from the effects arising from high inflation rates, but some groups are facing even greater variations, such as low-income consumers and families with elderly individuals. During 2015, these consumers main classes of expenditure were hardly affected by, among others factors, (i) higher electricity tariffs by around 50%; (ii) greater water and sewage tariffs by 13%; (iii) a more-than 10% rise in food prices; (iv) adjustments in gasoline and public transportation prices; and (v) a readjustment in medication of up to 7.7%. Given that most of these consumers income is spent on these classes of expenditure when compared to the average of Brazilian families, they do face higher inflation. In addition, most of these products are not easily replaced, which makes it difficult for these groups to keep within their budgets. Highincome groups of consumers with a less rigid expenditure structure are able to substitute part of their consumption in case of higher inflation, reducing unnecessary expenses or changing brands, for instance, what helps them to minimize their exposure to price rise. We expect that Brazilian inflation will be brought down next year, especially for these two specific groups of consumers: low-income families and families composed mostly of elderly individuals. The significantly smaller increases in administered tariffs, mainly in electricity, may serve as a factor for a relief in prices. Monetary policy in the United States should start its return to normality in December BRAZIL ECONOMIC WEEKLY Marcelo Cirne de Toledo The development of the labor market has been the main focus of the U.S. economy since the 2008 crisis. Given the close relation between labor market conditions and inflation, Federal Reserve s monetary policy has been basically guided by employment indicators over the past seven years. The recovery in labor market conditions has had significant progress and is according to expectations, which allows Fed to start raising interest rates gradually. Since last October's meeting, Fed s signs point to go ahead with its plan, which is to start a return to normality of monetary policy as of the meeting to be held on December 16, provided that no surprises come on the way. Thus, data on activity and inflation, in a lower proportion, to be gathered up to the December meeting, will be decisive for Fed to either keep on its current plan or postpone normalization for a while. The most recent economic activity indicators, especially concerning labor market, point that Fed should start bringing monetary policy to normalization at December meeting. After almost seven years with zero interest rate, the central bank of the United States will probably begin a smooth interest rate increase cycle. Fed s strategy is to raise interest rate around 1 p.p. during the following 12 months. 1

2 Inflation rate this year is even higher for the elderly and low-income families Myriã Tatiany Neves Bast The inflation in 2015 measured by diverse consumer price indexes already exceeded the rate of 9% the IPC-FIPE 1 index surpassed 10%, as disclosed in October. Without a doubt, all consumers are suffering from the effects arising from recent high inflation rates, but some groups are facing even greater variations. The analysis of some specific indexes, which measure inflation for low-income consumers and families with elderly individuals, allows us to note that these groups of consumers are more affected by higher inflation than the average Brazilian population. Consumers whose income is used mostly in irreplaceable consumption items, such as health and basic food products, are more exposed to higher inflation, as proved recently. This year, food prices raised around 10%, electricity tariffs are almost 50% higher, and public transportation and medication were adjusted up to 7.7%. That is, the main variations occurred in items which are not easily replaced with similar products and compose most of low-income families and elderly individuals basket of goods. 12,00% 1 IPC - The Elderly IPC - Low-income Families IPC - Brazil 9,48% 10,40% 10,21% 9,46% Inflation over the past 12 months 8,00% 7,33% 7,40% 7,14% 6,70% 6,00% 5,86% 4,00% 4,34% 3,68% 4,81% 4,69% 2,00% 1,04% Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Domestic Outlook To make these comparisons, we used three indices provided by Getúlio Vargas Foundation (FGV): 1. IPC-BR: measures inflation for families with income between 1 and 33 minimum monthly wages, and is used a proxy to measure Brazil s average inflation; 2. IPC-C1: measures inflation for families with income between 1 and 2.5 minimum monthly wages, that is, low-income population; 3. IPC-3i: measures inflation for families composed mostly of individuals over the age of 60 and with income between 1 and 33 minimum monthly wages, representing the inflation for the elderly. These three indexes structures are based on a set of goods and services consumed by these groups 2, considering price research covering seven cities: São Paulo, Rio de Janeiro, Belo Horizonte, Salvador, 1 IPC-FIPE measures inflation for consumers in the city of São Paulo and had an accretion of 10.09% over the past twelve months in October. 2 According to 2008/2009 Household Budget Survey (POF). 2

3 Recife, Porto Alegre and Brasília. In addition, the items composing consumer baskets are not the same: IPC- BR includes 338 sub-items, IPC-C1 is comprised of 294 sub-items (low-income families), and IPC-3i considers 289 sub-items (the elderly). Each group s types of consumer basket also influence the weight of each class of expenditure in each index s total inflation, as shown in the table below. IPC-Lowincome Families IPC-The Elderly IPC-Bras zil Food 28,90% 18,08% 22,37% Housing 28,24% 30,33% 25,32% Clothing 6,54% 4,14% 5,89% Health and Personal Care 11,76% 18,39% 11,43% Education, Reading and Recreation 3,83% 4,80% 7,37% Transportation 13,04% 16,00% 19,15% Miscellaneous Expenditures 3,28% 2,21% 2,67% Communication 4,41% 6,06% 5,80% Breakdown of each index, weighted by category As expected, the main classes of expenditure for low-income consumers are food and housing, both with a weight higher than the average of the Brazilian population: food for Brazilian in general account for 22.37% of their income, but represents 28.9% for low-income consumers. Also as expected, this group of consumers has significantly less expenses with education than the average population in Brazil, because most of them use state education. With regard to families composed mostly of elderly individuals, it is worth noting that income is used mainly in housing, followed by health and food, the latter being the first among the more significant groups of expenditure for the other population segments. These weight differences between the classes of expenditure in each index help to explain the reason for this distinctive behavior in time. During 2015, these consumers main classes of expenditure were strongly affected by, among others factors, (i) higher electricity tariffs by around 50%; (ii) greater water and sewage tariffs by 13%; (iii) a more-than 10% rise in food prices; (iv) adjustments in gasoline and public transportation prices; and (v) readjustment in medication of up to 7.7%. With regard to food, we noticed that this type of expenditure contributed to keep low-income families and the elderly inflations below Brazil s average inflation up to the previous year. However, after mid-2015, conditions got worse, because the prices of basic food products such as vegetables and fruits, bread, beans and others went up. With regard to housing, it is evident the effect of higher electricity tariffs on inflation for these groups of consumers: while this item helped to keep 2013 inflation down, it is now one of the villains, pressing indexes above the average in Brazil. Lastly, it is important to note that inflation for lowincome families has been pushed up by adjustments in transportation fares. For these families, inflation for transportation is 10.82% over the last 12 months up to September, while the Brazilian average is 8.31%. This is because public transportation is more significant for low-income families when compared to average Brazilian families, and transportation fares underwent a considerable adjustment. 2 18,00% 16,00% 18,90% IPC-Low-income families IPC-The Elderly IPC-Brazil 16,52% Inflation for food - 12 months Domestic Outlook 14,00% 12,00% 1 8,00% 6,00% 4,00% 2,00% 12,37% 8,63% 1,50% 7,92% 11,03% 2,86% 11,36% 10,46% 10,29% 8,88% 9,60% 5,40% 7,12% May-07 Sep-07 Nov-07 Mar-08 May-08 Sep-08 Nov-08 Mar-09 May-09 Sep-09 Nov-09 Mar-10 May-10 Sep-10 Nov-10 Mar-11 May-11 Sep-11 Nov-11 Mar-12 May-12 Sep-12 Nov-12 Mar-13 May-13 Sep-13 Nov-13 Mar-14 May-14 Sep-14 Nov-14 Mar-15 May-15 Sep-15 3

4 Inflation for housing - 12 months 16,00% 14,00% IPC-Low-income families IPC-The Elderly IPC-Brazil 12,91% 14,65% 13,91% 13,56% 12,00% 1 8,00% 6,00% 5,90% 6,30% 7,63% 4,00% 2,00% 1,97% 2,67% 1,16% May-07 Sep-07 Nov-07 Mar-08 May-08 Sep-08 Nov-08 Mar-09 May-09 Sep-09 Nov-09 Mar-10 May-10 Sep-10 Nov-10 Mar-11 May-11 Sep-11 Nov-11 Mar-12 May-12 Sep-12 Nov-12 Mar-13 May-13 Sep-13 Nov-13 Mar-14 May-14 Sep-14 Nov-14 Mar-15 May-15 Sep-15 12,00% 1 9,58% IPC-Low-income families IPC-The Elderly IPC-Brazil 9,63% 11,11% 10,82% Inflation for transportation - 12 months 8,00% 8,31% 8,16% 6,00% 6,03% 4,00% 4,95% 2,00% 0,33% -0,34% -2,00% May-07 Sep-07 Nov-07 Mar-08 May-08 Sep-08 Nov-08 Mar-09 May-09 Sep-09 Nov-09 Mar-10 May-10 Sep-10 Nov-10 Mar-11 May-11 Sep-11 Nov-11 Mar-12 May-12 Sep-12 Nov-12 Mar-13 May-13 Sep-13 Nov-13 Mar-14 May-14 Sep-14 Nov-14 Mar-15 May-15 Sep-15 Domestic Outlook Given that these groups of consumers use most of their income in the highlighted classes of expenditure in comparison with the average of Brazilian population, they perceive a higher inflation rate. In addition, most of these products are not easily replaced, such as electricity, basic food products and public transportation, which makes it difficult for these population groups to meet their budgets. High-income groups of consumers with a less rigid expenditure structure 3 are able to substitute part of their consumption in case of higher inflation, reducing unnecessary expenses or changing brands, for instance, which helps them to minimize their exposure to price rises. Finally, it is worth noting that the exchange rate depreciation this year had a relevant impact on basic consumption items, such as bread, oils and wheat. Accordingly, it also influenced the hike in inflation for low-income families, even if they are not affected by the rise in prices of imported products. We expect that Brazilian inflation is brought down next year, especially for these two specific groups of consumers: low-income families and families composed mostly of elderly individuals. The significantly smaller increases in administered tariffs, mainly in electricity, may serve as a factor for a in prices relief. We also expect an important reduction in food prices, even if basic food products can be hampered by the El Niño and its negative effects on the production of vegetables and fruits. Lastly, medication prices may affect families with elderly individuals, because the adjustment formula includes higher electricity tariffs and previous year s exchange variation. In any way, we hope that inflation for these two groups of families become lower than the Brazilian average in the next year. 3 That is, a lower portion of income is used in basic food, rental and health. For example, low-income families use 73% of their income in food, housing, health and education, but this percentage falls to 66% for the average of Brazilian families. 4

5 Monetary policy in the United States should start its return to normality in December Marcelo Cirne de Toledo The development of the labor market has been the main focus of the U.S. economy since the 2008 crisis. The country faced a significant increase in unemployment rate, in addition to people leaving the labor market and lower job quality (with the transfer to part-time activities) due to after-crisis recession. Given the close relation between labor market conditions and inflation, Federal Reserve (Fed) s monetary policy was basically guided by employment indicators over the past seven years. The recovery in labor market conditions has had significant progress and is according to expectations, which allows Fed to start raising interest rates gradually. Since last October meeting, Fed s signs to go ahead with its plan, which is to start a return to normality of monetary policy as of the meeting to be held on December 16, provided that no surprises come on the way. The notice disclosed after last meeting brought about a significant change, indicating that the next will be the first meeting at which the Committee will effectively discuss the option of starting interest rate adjustments. Thus, data on activity (and inflation, in a lower proportion) to be gathered up to the December meeting will be decisive for Fed to either keep on its current plan or postpone normalization for a while. Labor market behavior is the key variable in this scenario. October data reinforces the expectation of increasing interest rates in December. A total of 271,000 job vacancies were created last month, with one more fall in unemployment rate from 10% to 9.8% (this rate adds to the usual measure part-time jobs due to economic reasons). Most importantly is to observe the initiatives in the long run: over the last six months, job creation was kept above the 200,000 vacancies, thanks to the great performance of services and construction sectors, while job opportunities in industry were closed down. Even if job creation faces a slow pace when compared to the second half of 2014 (280,000 vacancies), it s a sufficient level to reduce ,00 189,50 243,33 83,67 144,17 27,33 124,83 250,50 187,67 226,17 200,83 127,67 255,17 201,17 Job creation 6-month average (in thousands) , , ,00 Oct-02 Jan-03 Apr-03 Jul-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Jan-07 Apr-07 Apr-09 Apr-10 Apr-12 Apr-13 Apr-15 Source: BLS Global Outlook unemployment rate. In turn, unemployment rate fell from 5.4% to 5.0% over the last six months, while the broad rate had a more expressive reduction, from 10.8% to 9.8%. Despite expectations that labor force participation rate among active aging population would increase, the most recent period saw a decrease to the lowest levels of the last decades. It means that, for reasons that still generate discussion, an increase in labor force participation rate will not be the probable relief for possible pressures from labor market. 5

6 19,0 17,0 15,0 Unemployment rate Average Broad Unemployment rate (U6) Average U6 17,1 Unemployment rate and broad unemployment rate (excluding seasonality) 13,0 11,0 9,0 7,0 5,0 3,0 11,8 10,8 10,4 10,0 9,0 9,9 8,8 7,8 7,8 7,9 6,1 6,8 6,3 5,9 5,0 4,6 4,4 3,8 3,4 Oct-64 Apr-66 Oct-67 Apr-69 Oct-70 Apr-72 Oct-73 Apr-75 Oct-76 Apr-78 Oct-79 Apr-81 Oct-82 Apr-84 Oct-85 Apr-87 Oct-88 Apr-90 Oct-91 Apr-93 Oct-94 Apr-96 Oct-97 Apr-99 Oct-00 Apr-02 Apr-05 9,80 5,00 Source: BLS Participation rate (economically active population/ active aging population) 68,0 67,0 66,0 65,0 64,0 63,0 62,0 61,4 65,7 64,3 64,6 63,8 62,8 66,8 66,1 66,9 66,4 67,3 65,9 66,4 64,4 65,0 63,2 62,4 61,0 60,6 61,1 Source: BLS 60,0 59,0 58,0 58,7 58,7 60,0 Oct-62 Oct-63 Oct-64 Oct-65 Oct-66 Oct-67 Oct-68 Oct-69 Oct-70 Oct-71 Oct-72 Oct-73 Oct-74 Oct-75 Oct-76 Oct-77 Oct-78 Oct-79 Oct-80 Oct-81 Oct-82 Oct-83 Oct-84 Oct-85 Oct-86 Oct-87 Oct-88 Oct-89 Oct-90 Oct-91 Oct-92 Oct-93 Oct-94 Oct-95 Oct-96 Oct-97 Oct-98 Oct-99 Oct-00 Oct-01 Oct-02 Oct-04 Oct-05 In addition to employment data, other activity indicators have also corroborated the understanding that the expansion of the conomic activity is favorable, pointing to a GDP growth rate of around 2.5%. Vehicle sales are a great and convenient indicator of household consumption behavior. Over the last six months up to October, sales expanded 11% yearly, which brought the current level to around 2% above the pre-crisis level. Production indicators show that industry remains stagnant (as measured by processing industry s ISM), while the expansion of the service sector is steady and showed an increase in the margin, which is confirmed by job creation data. 20,0 17,0 15,55 16,18 14,58 14,58 16,11 15,29 17,22 16,32 18,12 Sale of vehicles in the USA excluding seasonality and on a year basis (millions of units) 14,0 12,73 Global Outlook 11,0 11,68 Total 9,36 Total - Média móvel 3 meses 8,0 Apr-07 Apr-09 Apr-10 Apr-12 Apr-13 Apr-15 Source: Bloomberg 6

7 ISM index for processing industry (excluding seasonality) 63,0 59,0 55,0 61,4 57,2 57,2 55,2 52,6 58,8 56,4 59,6 54,2 54,1 58,1 56,0 53,50 51,0 47,0 52,4 50,8 49,5 50, ,8 51,50 50,10 43,0 39,0 35,0 Source: Bloomberg 31,0 33,1 Jul-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Jan-07 Apr-07 Apr-09 Apr-10 Apr-12 Apr-13 Apr-15 63,0 61,2 59,1 59,0 55,0 56,8 51,0 61,3 55,5 58,4 55,3 51,8 57,2 53,2 50,9 52,7 58,6 57,1 55,5 54,9 56,1 53,7 52,5 52,5 55,7 59,1 Global Outlook ISM index for other sectors (excluding seasonality) 47,0 49,3 43,0 45,0 39,0 35,0 37,6 40,0 Jul-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Jan-07 Apr-07 Apr-09 Apr-10 Apr-12 Apr-13 Apr-15 Source: Bloomberg The most recent economic activity indicators, especially concerning labor market, point that Fed should start bringing monetary policy to normalization at the December meeting. After almost seven years with zero interest rate, the central bank of the United States will probably begin a smooth interest rate increase cycle. In our opinion, Fed s strategy is to raise interest rate around 1 p.p. during the following 12 months. 7

8 Bradesco Macroeconomic Forecast * 2015* 2016* DOMESTIC ACTIVITY, INFLATION AND INTEREST RATES GDP (%) Agriculture (%) Industry (%) Services (%) Private consumption (%) Government consumption (%) Investment (%) Exports of goods and services (%) Imports of goods and services (%) GDP (R$ billion - current prices) 2,409 2,718 3,107 3,328 3,886 4,374 4,713 5,157 5,521 5,934 6,262 GDP (US$ billion) 1,107 1,395 1,693 1,666 2,208 2,612 2,411 2,390 2,346 1,789 1,668 Population (million) Per Capita GDP (US$ - current prices) 5,865 7,281 8,716 8,469 11,083 13,232 12,105 11,889 11,571 8,751, 8,095, Industrial Production - IBGE (%) Unemployment Rate - IBGE (%) Retail Sales - (%) CPI - IPCA - IBGE (%) CPI - FIPE (%) WPI - IGP-M - FGV (%) Nominal Interest Rates - Selic target (end of period - %) Nominal Interest Rates - Selic target (12-month - %) ,82 10,81 10,81 Real Interest Rates - Selic (12-month - %) ,25 4,54 4,54 EXTERNAL ACCOUNTS AND FX Trade Balance (US$ billion) Exports (US$ billion) Imports (US$ billion) Trade flow (exports + imports) (% of GDP) Deficit of Services and Income (US$ billion) Current Account Deficit (US$ billions) Current Account Deficit (% of GDP) Foreign Direct Investment (US$ billions) FX - end of period (R$ / US$) FX - yearly average (R$ / US$) Nominal FX devaluation (YoY - %) Nominal FX devaluation (average - %) International Reserves (US$ billion) Total Medium and Long term External Debt (US$ billion) FISCAL ACCOUNTS Primary Surplus (R$ billions) Primary Surplus (% of GDP) Public Sector Nominal Balance (% of GDP) Global Outlook Gross Public Debt (domestic and external) (R$ billion) Gross Public Debt (domestic and external) (% of GDP) As of November 6 th (*) Forecast. na = not available. Source: Official figures Production and forecasts(*): BRADESCO 1,336 1,542 1,740 1,973 2,011 2,243 2,583 2,748 3,252 4,025 4,

9 Team Octavio de Barros - Macroeconomic Research Director Marcelo Cirne de Toledo Global economics: Fabiana D Atri / Felipe Wajskop França / Thomas Henrique Schreurs Pires Brazil: Igor Velecico / Andréa Bastos Damico / Ellen Regina Steter / Myriã Tatiany Neves Bast / Ariana Stephanie Zerbinatti Brazilian sectors: Regina Helena Couto Silva / Priscila Pacheco Trigo / Leandro de Oliveira Almeida Proprietary survey: Fernando Freitas / Leandro Câmara Negrão / Ana Maria Bonomi Barufi Internships: Davi Sacomani Beganskas / Henrique Neves Plens / Mizael Silva Alves / Gabriel Marcondes dos Santos / Wesley Paixão Bachiega / Carlos Henrique Gomes de Brito / Gustavo Assis Monteiro Team - BRADESCO does not accept responsibility for any actions/decisions that may be taken based on the information provided in its publications and projections. All the data and opinions contained in these information bulletins is carefully checked and drawn up by fully qualified professionals, but it should not be used, under any hypothesis, as the basis, support, guidance or norm for any document, valuations, judgments or decision taking, whether of a formal or informal nature. Therefore, we emphasize that all the consequences and responsibility for using any data or analysis contained in this publication is assumed exclusively by the user, exempting BRADESCO from all responsibility for any actions resulting from the usage of this material. We all point out that access to this information implies acceptance in full of this term of responsibility and usage. The reproduction of the content in this report (partially or in full) is strictly forbidden except if authorized by BRADESCO or if the sources (the name of the authors, publication and BRADESCO) are strictly mentioned. 9