Depec-Bradesco Economic Highlights Year XII Number 129 - December, 23 2015 Differences in regional inflation dynamics are explained by behavior of food, service and regulated prices Myriã Tatiany Neves Bast The regional inflation dynamics is highly diverse. It is therefore worthwhile taking a closer look at what happened in all the state capitals included in the IPCA consumer price index this year. While the overall index moved up by 10.48% in the 12 months through November, some cities recorded a higher figure, such as Curitiba with 12.24%, while others experienced less intense upturns, exemplified by Belo Horizonte, with 9.06%. Each state capital has a different weight within the IPCA and the weight of each item varies from region to region, given that each city s typical consumer basket is distinct. For example, the weight of food in São Paulo is 23.63%, while in Belém it is 34.07%. These differences in weight partially explain differences in variations this year, but there are other important particularities. Weight of the state capitals in the IPCA and weights by group Weight of capital in the IPCA Food Housing Home appliances Apparel Transport Health and Personal Care Personal Expenses Education Communication São Paulo 30,70% 23,63% 15,43% 3,84% 5,48% 19,88% 11,65% 11,32% 4,98% 3,80% Rio de Janeiro 12,10% 23,83% 17,74% 3,54% 4,72% 17,41% 11,84% 11,37% 4,96% 4,58% Macroeconomic Research Department Belo Horizonte 10,90% 21,93% 16,66% 5,08% 6,55% 17,96% 10,89% 12,22% 4,66% 4,04% Porto Alegre 8,40% 26,10% 14,70% 4,74% 6,29% 18,32% 11,07% 10,63% 4,41% 3,73% Curitiba 7,80% 23,69% 17,68% 4,41% 7,05% 19,33% 11,23% 9,82% 3,31% 3,48% Salvador 7,40% 27,98% 14,58% 4,65% 6,74% 18,98% 10,27% 8,43% 4,43% 3,95% Recife 5,10% 27,31% 14,55% 5,00% 7,43% 15,04% 12,54% 9,92% 4,55% 3,65% Belém 4,70% 34,07% 13,18% 5,20% 8,40% 12,64% 10,37% 8,34% 4,53% 3,26% Goiânia 3,60% 23,82% 17,12% 3,99% 5,63% 20,22% 10,12% 10,92% 4,28% 3,89% Fortaleza 3,50% 32,13% 14,57% 4,37% 6,81% 15,61% 9,60% 9,42% 4,31% 3,19% Brasília 2,80% 21,99% 16,39% 4,75% 6,08% 19,48% 9,93% 11,53% 5,25% 4,59% Vitória 1,80% 21,81% 18,25% 5,36% 6,59% 18,21% 11,58% 10,06% 3,57% 4,55% Campo Grande 1,50% 24,04% 15,59% 4,59% 6,27% 18,68% 11,46% 11,23% 3,89% 4,25% 12,24% 12,0% 11,44% 11,19% 10,87% 10,69% 10,53% 10,48% 10,15% 9,75% 9,53% 9,52% 9,51% 9,35% 8,0% 4,0% 9,06% change in IPCA state capitals 1
12 months percent change in IPCA state capitals 12,6% 9,6% 8,30% Brasil Goinânia Brasília Belém Fortaleza Recife Salvador Belo horizonte Rio de Janeiro São Paulo Curitiba Porto alegre Campo Grande Vitória 12,24% 11,44% 11,19% 10,87% 10,48% 10,15% 9,75% 9,35% 9,06% 7,34% 6,78% 6,6% 6,21% 5,84% 5,74% 5,41% 4,72% 3,6% dez/12 jan/13 fev/13 mar/13 abr/13 mai/13 jun/13 jul/13 ago/13 set/13 out/13 nov/13 dez/13 jan/14 fev/14 mar/14 abr/14 mai/14 jun/14 jul/14 ago/14 set/14 out/14 nov/14 dez/14 jan/15 fev/15 mar/15 abr/15 mai/15 jun/15 jul/15 ago/15 set/15 out/15 nov/15 In recent years, we have not observed any behavior that is characteristic of each region. The standard deviation increased this year, but was not very different to 2012 and 2013, or pre-2008 levels. Consequently, this year s variations should not be regarded as a trend, in which a given city would record less variations in a given IPCA component. We therefore analyse the main disaggregations in all state capitals, pointing out the main highlights and specific characteristics of each region. 1,2% 1,0% 1,12% 0,98% Regional standard deviation: 2006-2015 0,8% 0,78% 0,84% 0,69% 0,80% 0,83% 0,6% 0,61% 0,60% 0,45% 0,4% 0,2% 0,0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 As everyone knows, this year was marked by the strong upturn in regulated prices, especially those of electricity and gasoline. It is important to bear in mind that this group represents 25% of the IPCA. As a result, price hikes as substantial as these are responsible for a good part of this year s 10.66% increase in the IPCA (equivalent to around 4.5 p.p.). While electricity tariffs in the 12 months through November moved up by 51.25% on average, in São Paulo they jumped by 69.66% and in Belém climbed by only 16.31%. These differences explain some of disparities in the regulated price variations in each region, given that electricity represents 16% of the regulated total (and 4% of the overall IPCA). As each power concessionaire has different needs, so do price rises differ among themselves, reflecting as they do the hydrological risk of each company, how much power each firm acquires from Itaipu, etc. The case of Curitiba can also be explained by ICMS (state VAT) increase at the beginning of the year, which affected gasoline prices, among other products. 2
0,26 0,21 0,16 22,68% 20,04% 19,79% 19,45% 18,79% 17,94% 16,97% 16,92% 16,80% 15,77% 15,18% 14,58% 13,57% 12,62% change in regulated price IPCA state capitals 0,11 0,06 0,01 Main regulated items in the state capitals (12 months percent change) (*) in brackets, weight of the item in the IPCA. Electricity (4,02%) Gasoline (4,05%) Urban Bus Fares (2,58%) São Paulo 69,66% 19,24% 16,67% Curitiba 67,72% 21,74% 16,93% Porto Alegre 64,40% 22,24% 10,16% Brasília 55,54% 18,16% 33,33% Goiânia 53,40% 12,10% 17,85% Brasil 51,25% 19,33% 15,08% Rio de Janeiro 50,32% 18,13% 13,33% Vitória 44,50% 17,19% 0,00% Belo Horizonte 41,78% 21,48% 19,31% Campo Grande 38,99% 10,87% 7,35% Fortaleza 28,08% 18,91% 20,00% Recife 23,12% 23,13% 13,50% Salvador 22,01% 17,03% 10,10% Belém 16,31% 20,23% 12,44% In regard to non-regulated prices, two groups deserve special attention due to their importance: food, which has a weight of almost 25% in the IPCA, and services, with a weight of 35%. 0,15 0,13 0,11 0,09 0,07 0,05 0,03 0,01 13,67% 13,63% 13,14% 12,60% 12,41% 12,22% 11,95% 11,93% 11,84% Food recorded one of the largest variations in recent years, behind only 2002, primarily due to weather factors, such as water shortage at the beginning of the year and consequences of El Niño in the last few 11,54% 11,05% 11,04% 10,77% 8,99% change in food and beverage IPCA state capitals months, as well as currency depreciation and reduction in planted area in certain regions. These weather problems affect the regions in different ways, which becomes very clear from fresh products behavior: 3
in Vitória, the upturn in these items reached 44%, versus 19.44% in Brazil as a whole and just 11.89% in Fortaleza. However, large part of difference between the food increases in Salvador (13.67%) and Belo Horizonte (8.99%) is due to the food prices outside home behavior: while Salvador and Goiânia posted hefty period increases in this group, both of which close to 14%, in Belo Horizonte they rose by almost 7% only 1. The other more tradable food items also presented regional differences, but not as large as those cited. Service prices behavior has been calling increasing attention since 2009, especially due to its link with the impact of social change on the economy, such as upward social mobility 2 and healthy job market. After peaking at more than 10% in 2011, this group has remained exceptionally rigid, recording upturns of very close to 8% since then. In this case also, there are big differences between the state capitals, exemplified by Fortaleza, with an increase of 10.7%, and Brasília, with a positive variation of just 5.9%. 12,00% 10,00% 8,00% 10,7% 9,6% 9,5% 8,7% 8,7% 8,6% 8,4% 8,4% 8,2% 8,1% 7,5% 7,3% change in service IPCA state capitals 6,00% 5,9% 4,00% 2,00% 0,00% These prices are closely related to household income, which has recorded strong gains in recent years, due to the tight job market and historically low levels of unemployment. In recent quarters, however, this trend has reversed, with rising unemployment and decelerating income gains, with certain regions suffering more intense adjustments. Logic would therefore dictate that service price increases would be more moderate. Income Service IPCA Brazil 1,34% 8,37% Recife 1,03% 9,49% Salvador 0,90% 9,56% Belo Horizonte 1,10% 7,33% Rio de Janeiro 0,66% 8,74% São Paulo 1,08% 8,10% Porto Alegre 4,65% 8,16% However, what we have actually seen is that certain regions are highly resistant to a price deceleration, even those where income has been slowing. This is the case of Salvador and Rio de Janeiro, for example, where income slowed substantially (between 4 and 6 p.p. in the last six months), but service prices continued to accelerate, or at least maintained the same exceptionally high level. Nominal income and change in service IPCA state capitals 1 It is worth noting that food outside home is considered a service and is closely related to the behavior of this group, but also reflects pressure from other food items. 2 In Working Paper 381 - Demand for Services Rendered to Families in Brazil in the 2000 s: an Empirical Analysis of Consumer Patterns and Social Expansion, the author finds evidence that the highest income group was in fact more important than the so-called new middle class in this tendency. 4
Service IPCA and nominal income trends 12 months percent change Salvador 1 15,0% 13,0% 11,0% Income - Salvador Services - Salvador 8,24% 8,54% 14,93% 8,33% 8,50% 8,02% 10,0% 9,56% 9,5% 8,5% 8,0% * y-o-y income. 6-month average 5,0% 3,0% 7,45% 4,65% 4,41% 7,5% 4,85% 1,0% 6,5% -1,0% 6,0% -3,0% Feb-13-1,77% -1,62% May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 5,5% 1 15,0% 13,0% Income - RJ Services - RJ 10,85% 15,84% 9,66% 12,05% 12,0% 10,0% Service IPCA and nominal income 12 months percent change Rio de Janeiro 11,0% 10,69% 9,21% 9,21% 9,28% 8,15% 8,96% 8,29% 6,86% 8,74% 8,25% 8,0% * y-o-y income. 6-month average 5,0% 5,38% 3,0% Feb-13 6,46% May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 6,0% In Salvador, in addition to food outside home, which we have already mentioned, we saw upturns in other services, such as sewing, hairdressing, auto repairs and sundry courses, such as languages and IT. This acceleration has intensified since mid-year, precisely because of Main itens - service IPCA - annual variation* these items, and was also evident in other capitals in the Northeast, such as Recife and Fortaleza. Those prices most linked to past inflation, such as rents and regular courses, even recorded deceleration this year, especially rents, reflecting real estate market weakness in Salvador. Rents Personal services Regular courses Sundry courses 2014 2015 2014 2015 2014 2015 2014 2015 Brazil 9,35% 7,78% 9,54% 9,19% 8,87% 9,17% 8,10% 10,33% Goiânia 6,29% 8,34% 9,24% 9,72% 11,11% 9,48% 7,05% 8,04% Brasília 7,53% 4,09% 10,27% 9,76% 8,70% 10,22% 11,17% 5,50% Belém 4,45% 4,15% 9,95% 10,38% 5,93% 6,80% 10,68% 8,87% Fortaleza 8,22% 8,62% 10,93% 13,56% 10,66% 8,11% 10,29% 9,77% Recife 15,10% 10,49% 8,98% 10,21% 6,17% 8,03% 3,24% 10,02% Salvador 7,32% 5,76% 8,16% 9,53% 9,61% 9,06% 8,28% 12,12% Belo Horizonte 6,98% 6,75% 7,47% 9,07% 8,96% 9,69% 11,25% 9,97% Rio de Janeiro 11,08% 10,83% 11,99% 8,82% 11,68% 10,10% 7,45% 10,52% São Paulo 10,24% 7,81% 9,55% 8,77% 7,95% 9,36% 6,91% 12,24% Curitiba 8,68% 8,40% 9,59% 10,07% 9,02% 9,15% 9,07% 8,99% Porto Alegre 10,10% 5,23% 9,59% 7,29% 9,52% 8,55% 6,99% 7,78% Campo Grande 7,60% 6,48% 10,11% 9,04% 10,06% 6,88% 11,16% 6,11% Vitória 7,50% 3,62% 8,83% 8,30% 9,46% 10,11% 10,24% 5,45% (*) annual variation in 2014 and change accumulated through November 2015 5
In Rio de Janeiro, another case of strong service price rigidity despite floundering income, we also observed pressure from sundry courses and greater residential rent prices resistance. São Paulo is an example where the weak job market is beginning to affect service prices, which have fallen from an upturn of 9% in January to one of 8.1% more recently. This relief becomes more apparent when we analyze rents and personal services behavior, but it is not an across-the-board tendency, as we can see from the strong upturn in regular and sundry courses. In fact, decompression of the group as a whole is still modest, mainly because series has proved to be volatile, but does provide us with important information, given that the trend in other capitals was one of continuing year-long acceleration, especially in regard to items more linked to final demand, such as personal services and sundry courses. 11,0% 10,33% 10,0% 8,28% 9,03% 9,46% 9,08% 9,07% Income - SP Services - SP 9,8% 9,3% Service IPCA and nominal income trends 12 months percent change São Paulo 8,0% 8,78% 7,04% 7,23% 8,60% 8,67% 8,8% 6,0% 5,0% 6,51% 8,55% 8,27% 8,35% 8,05% 5,05% 8,3% 8,10% 4,65% * y-o-y income. 6-month average 4,0% 7,8% Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Indeed, service prices have shown strong resistance to deceleration despite the economy recession, mainly because many items are explicitly adjusted based on past inflation in their contracts, such as rents and school fees. We would have expected a gradual deceleration of this group, but what we have actually witnessed is higher-than-expected rigidity. Results can be at least partially explained by the upturn in costs at the beginning of the year, especially those of electricity, which is an important cost item in this sector. This strong adjustment has offset part of the deceleration that should have taken place due to falling income. In our opinion, this behavior should remain evident for one or two quarters after the strong cost adjustment, but in this particular case we have seen its continuation beyond this, suggesting a stronger inertial process. In the case of durable goods, not dealt with in this paper, we have seen more similar behavior among the state capitals, all of which have recorded lower variations this year. In 2016, we expect inflation in the groups discussed above to fall over present levels. In the case of regulated prices as a whole, we estimate a strong decline from the current 18% to 7%, with food falling from an upturn of 12% to one of 8%. The latter deceleration will be due to reduced impact of the exchange rate on these prices next year, as well as still exceptionally low international prices, given that the leading grain crops tend to be highly productive in El Niño years. Finally, we also expect a deceleration of service prices, albeit more gradual, from an increase of 8.2% this year to one of 7% in 2016. Inflation in state capitals, captured by the IPCA, should follow these major decelerations, possibly reducing the differences between them. We expect the main points of divergence to be: i) food, given that the El Niño effects should persist in the first quarter, affecting each region differently (typically drought in the Northeast and excessive rainfall in the South); ii) electricity tariff hikes, reflecting specific needs of each company; and iii) tax changes, such as the ICMS increases already announced by certain states and whose impact will be felt next year 3. 3 São Paulo, Rio Grande do Sul, Federal District, Pernambuco, Minas Gerais and Mato Grosso do Sul have already announced or are studying changes in their ICMS rates. 6
Team Octavio de Barros - Macroeconomic Research Director Marcelo Cirne de Toledo Global economics: Fabiana D Atri / Felipe Wajskop França / Daniela Cunha de Lima / 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 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 - 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. 7