😓 A new meaning for inflation

Good morning! Today, we try to understand why perceptions of inflation are so negative, despite lower headline numbers. A warning against the government’s abundant tax waivers. And a new proposal to settle disputes around the 2015 Mariana dam disaster.

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Another look at rising prices

This week’s May inflation reading shows that Brazil’s “misery index,” the sum of the seasonally adjusted unemployment rate and the annual inflation rate, continues to go down. But Brazilians are still feeling the discomfort of high prices.

State of play. An April survey shows that 46 percent of voters consider the government’s anti-inflationary policies to be bad or terrible, even though 12-month inflation numbers are nowhere near their April 2022 peak.

 Why it matters. Headline inflation is always in reference to where prices were a year ago, but voters experience consumer price behaviors more intuitively, i.e., “I am paying higher prices than I used to for goods and services.”

By the numbers. Since January 2020, just prior to the pandemic, prices in Brazil have risen by more than 30 percent — as data from the Central Bank shows.

What’s happening. André Braz, an economist and inflation researcher at the Brazilian Institute of Economics at the think tank Fundação Getulio Vargas, tells us that the country’s inflation has been concentrated in food prices. “For that, the effects of monetary policy are quite limited, as these price hikes are more linked to supply shocks rather than heated demand,” he says.

• Food prices weigh disproportionately heavier on low-income households. And the effects of the Central Bank’s strategy of keeping interest rates high has more of an effect on services and durable goods consumed by richer folks.

• “If inflation is concentrated in food, there is little the monetary authority can do. It won’t hike interest rates to tame the price of potatoes or carrots,” Mr. Braz adds.

Bottom line. “Headline inflation numbers are incredibly valuable data for us economists. But for people in their daily lives, they compare how much they were paying for things before and now. The perception is that their bills just keep going up,” he explains.

Terrible stretch. The past four years have been filled with factors that drove food inflation upward:

• 2020: People in Covid lockdown-mode consumed more food at home, and fear of shortages caused grocery bills to balloon.

• 2021: Brazil faced a water crisis that made energy costs soar.

• 2022: The Russia-Ukraine war led to higher fertilizer prices, affecting costs for farmers.

• 2023 and 2024: Last year saw food prices rising by just 1 percent, but crops have already been affected by climate events in 2024. We explained this week that the cost of rice (one of Brazil’s most important staples) was up by 10 percent over the past month. 

Bottom line. Prices are high, therefore so is the perception that inflation is high. Regardless of what the headline figure says.

Accounts court warns about excessive tax waivers

As expected, the Federal Accounts Court approved the 2023 accounts of the Luiz Inácio Lula da Silva administration, with caveats. Among the recommendations and warnings, the court raised red flags about the excessive amount of tax waivers, which now amount to almost 5 percent of the country’s GDP. 

What they are saying. “It makes no sense for a country that is already considerably in debt to insist on so many tax incentives that often fail to achieve their objective,” court member Vital do Rêgo, the analysis rapporteur, said in his opinion.

 Why it matters. The government’s struggles to make ends meet have been a recurring theme — fueling distrust in the economy and putting pressure on Brazil’s stock market, yield curve, and currency.

Jitters. The Brazilian real has continued to lose ground against the U.S. dollar. On Wednesday, the exchange rate closed at USD 1 : BRL 5.40. Markets reacted poorly after Lula said the deficit will be reduced when Brazil increases tax collection and interests go down — not citing any drive to reduce public spending.

• The S&P/B3 Ibovespa VIX, a Brazilian “fear index,” is up by 30 percent since May 17. 

But, but, but … Even within the administration, the idea of boosting revenue is getting a serious reality check. Planning Minister Simone Tebet on Wednesday said the government is “running out of alternatives” to increase tax revenue.

• Meanwhile, the Federal Accounts Court is poised to prevent the government from limiting how much money from the federal budget can be frozen as part of the effort to reach its zero-deficit goal.

• The government wanted a cap of BRL 25 billion (USD 4.62 billion). Without the cap, officials could be punished under Brazil’s fiscal responsibility laws if proven that they did not make enough budgetary cuts.

State of play. As we explained yesterday, the government suffered a significant loss this week, as Congress repealed a presidential provisional decree that would have boosted tax revenue. Worse than the defeat itself is the fact that the case eroded the government’s support from economic elites; it already has an unsteady footing in Congress.

Thought bubble. The government is making too many mistakes, as it seems it has yet to realize it is dealing with the most conservative Congress since the start of Brazil’s New Republic in 1985. 

• Add to that the fact that despite winning the election with the support of a big tent coalition, Lula has conducted an administration in his own image. 

• That has isolated the government socially and politically, and has spent the goodwill it was given last year (even from market agents).

Mining companies’ new proposal to compensate for Mariana dam tragedy

Brazilian Vale, Anglo-Australian BHP, and Samarco (a joint venture between the two) increased their previous offer to settle a reparation agreement for the November 2015 Mariana dam disaster, which resulted in 19 deaths and widespread environmental devastation caused by the spill of the equivalent of 25,000 Olympic swimming pools of toxic sludge. 

• After receiving a counter-proposal from the Brazilian government of BRL 109 billion (USD 20.18 billion) in direct compensation in June, they increased their previous offer from BRL 72 to 82 billion. 

 Why it matters. This amount is “new money,” as the companies claim to have already spent, since the disaster, BRL 37 billion on compensation for victims and on the reconstruction of two districts in the city of Mariana.

Into the weeds. The companies also boosted the amount to be allocated to planned environmental recovery works (such as removing waste from the Rio Doce) from BRL 18 to 21 billion. The increase will pay for a reforestation program in the affected region, which alone will cost around BRL 3 billion. 

• With the new proposal, total compensation would reach BRL 140 billion (nearly USD 26 billion) to be paid within 20 years; the government hoped for a time frame of 12 years.

Responsibility. As we showed in 2018, all of this could have been avoided if Samarco, the dam’s operator, had spent just USD 1.5 million on safety measures. 

• In 2016, Samarco, Vale, and BHP signed an agreement with federal and state-level authorities, promising to create a foundation to implement compensation measures (they disbursed the aforementioned BRL 37 billion through it). 

• But the hundreds of thousands of people affected by the disaster have yet to receive compensation.

Hit them where it hurts. In addition to lawsuits in Brazil, the miners also face lawsuits abroad. As we discussed in our Explaining Brazil podcast, thousands of plaintiffs seek compensation in a massive lawsuit in British courts. 

• The case involves more than 200,000 plaintiffs from indigenous Krenak communities whose lands run along the banks of the Rio Doce, as well as 25 municipalities, more than 500 companies, and the Catholic Church. 

• Members of other indigenous communities and a significant number of Afro-Brazilian quilombolas joined the case in 2023. In August last year, the amount of compensation sought has also risen from GBP 5 billion to GBP 36 billion.

Quick catch-up

The Supreme Court decided that returns on the FGTS mandatory severance will have to at least match inflation. While the ruling affects public accounts, the government avoided a worst-case scenario: a retroactive effect to the changes.

Factions of the Lula administration want the government to wait at least until after the country holds the UN Climate Conference next year before starting to drill for oil near the mouth of the Amazon River — to reduce the risks of sending contradictory messages about its commitment to reducing carbon emissions.

• In an event in Rio de Janeiro, Lula defended these oil ventures,saying Brazil “will not throw away any opportunity to make this country grow.”

The Feds recommended charges of corruption, money laundering, and criminal association against Communications Minister Juscelino Filho. Lula said he has the right to prove his innocence.

The D.C. Circuit Court of Appeals on Tuesday rejected oil giant Petrobras’s efforts to dodge a lawsuit in the U.S., paving the way for investor EIG Global Energy Partners to recover over USD 221 million in compensatory damages.

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