Brazil registers a deflation of 0.68% in July thanks to a drop in fuel prices

A customer in a market in Santo Amaro, a middle-class neighborhood in São Paulo. Lela Beltrão

Prices in Brazil fell for the first time in two years.

In July, the country registered a deflation of 0.68% compared to a slight rise of 0.67% in June.

According to the Brazilian Institute of Geography and Statistics (IBGE), which released the data on Tuesday, this is the lowest rate for inflation since 1980. Despite the respite, so far this year inflation has accumulated a rise of 4, 77%, and 10.07% if the last 12 months are taken into account.

The deflation in July is mainly explained by the drop in fuel prices (-14.15%), especially gasoline, whose price fell by 15.48% and pushed the entire transport sector down, despite that diesel, mostly used by truckers, continued to rise in price.

Residential electricity (-5.78%) was also decisive for Brazil to experience this exceptional situation in July.

The drop in fuel prices is explained by several factors.

On the one hand, the drop in the international price of oil allowed Petrobras to lower the sale price at its refineries for the first time in a long time.

On the other hand, there is the hand of the Government and the National Congress.

At the end of July, a measure was passed to reduce the ICMS (Tax on the Circulation of Goods and Services), a key tax in the formation of prices.

The reduction of taxes, a few weeks before the elections, was a strategy of President Jair Bolsonaro and his allies to try to alleviate the erosion of his popularity due to the soaring increase in prices.

Even so, analysts warn that the effect is a mirage, and that inflation will have a rebound effect in 2023, when taxes will rise again.

In addition, although filling the car's tank was a little cheaper in July, going to the supermarket was still expensive.

Food prices gave no respite and advanced by 1.3%, the sector that became more expensive and the one that has the most impact on the daily life of the most vulnerable.

With the cut in taxes, the financial market has been reducing projections for inflation for this year for weeks.

According to the latest report released by the Central Bank, on August 8, inflation is expected to close this year at 7.11%.

The side effect is an increase in inflation projections for 2023, which is already at 5.36%.

But it matters little what happens in 2023 when the country is focused on what happens on October 2, when the first round of elections is held.

Bolsonaro needs to boost his popularity quickly if he wants to snap at the heels of Lula da Silva, at the moment his clear favourite.

According to the latest survey by the Datafolha institute, from the end of July, the leader of the left has 47% support, compared to 29% for the current president.

The drop in prices in July is a breath of fresh air for Bolsonaro and his campaign team will surely exploit it with force in the coming days.

This same Tuesday, in addition, the president will be able to commemorate another conquest: he begins to enter the bank accounts of more than 20 million Brazilians the aid of 600 reais per month (118 dollars) approved in July.

The aid, which will only be in force until December, was described as electioneering by the opponents of the far-right leader, but it is expected to be key in the comeback in the polls that the president's allies expect.

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