Depec-Bradesco Economic Highlights - Economia em Dia

Depec-Bradeso Economic Highlights
the projected infl ation in their model. Hypothetically,
let’s imagine a situation where infl ation is in the center
of the target at the start of a year and that, solely
on account of an external shock, both infl ation and
infl ation expectations point to a higher-than-target
value. In this case, it makes no sense to assume
that there are two vectors pushing infl ation up: one
from the external shock which leads to an increase
in current infl ation and another from an “exogenous”
deterioration in expectations. Expectations have
worsened fundamentally because of the shock and
not on account of any other factor. Therefore, to say
8,5%
6,5%
4,5%
2,5%
5,2%
7,2%
8,1%
5,5%
4,4%
3,0%
mar/04
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set/06
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set/08
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jan/11
With regard to the infl ation cores, our diagnosis is that
the acceleration seen over the last few months is the
lagged refl ex of last year’s growth in economic activity,
particularly in the labor market. It’s like taking a look in
the rear-view mirror: the infl ation that we are experiencing
right now is the result of the marked level of economic
activity that was registered in previous quarters. As
5,6%
5,1%
that the deterioration in infl ation expectations would
be an additional risk factor is wrong, and is the same
as counting the same shock twice. As a result, in our
opinion, the deterioration in the infl ation expectations
for 2011 is suffering to a marked degree from this
“double counting” effect due to the pronounced
correlation between infl ation expectations and current
infl ation, infl uenced by the commodities shock. In
addition to this pronounced correlation with current
infl ation, as can be observed in the following graph,
the predictive power of infl ation expectations at times
of external shocks seems even smaller.
6,4%
IPCA
Expectations 12 months forward
4,0%
5,3%
4,5%
5,9%
5,5%
IPCA infl ation
and infl ation
expectations 12
months ahead,
synchronized 2004
- 2011
Source: IBGE, BC
Produced by: BRADESCO
can be noted in the following table, among the main
determinants of the underlying infl ation, the items that
most draw attention are the earnings of households and
the labor market. What is expected regarding this aspect
is that the Central Bank will adjust its instruments in order
to bring economic growth to below potential, and in our
opinion, this is what is currently being done.
July 2008 February 2011
Expectation for the current year 6.50% 5.79%
Change in 6 months (bps) 213 88
Expectation for the next year 4.98% 4.78%
Change in 6 months (bps) 94 28
Infl ation for the previous year 4.46% 5.91%
Gap (6 month average) 2.14% 0.52%
Commodities in reais (variation over 6 months) 17.68% 16.29%
Unemployment Rate (6 month average) 7.93% 6.46%
Real Earnings (annualized 6 month variation) 4.42% 8.19%
Domestic Absorption (annualized 2 quarters variation) 9.93% 7.35%
Even before the start of the monetary tightening cycle
that is currently in progress, economic activity had
already been giving signs that growth, in the margin, is
below potential and the fi gures for the labor market point
unmistakably in this direction, as can be observed in the
graphs below. Growth in engagement and in earnings
dropped from a fi gure close to 1.0% at the end of last
Comparison between
indicators which are
signifi cant for infl ation
during monetary tightening
cycles
2008 - 2011
Source: IBGE, BC
Produced by: BRADESCO
year to a slightly negative fi gure at the start of this
year, while engagement recently slowed down from a
monthly rate of slightly more than 1.0% to a fi gure of
less than 0.5%. Brazilian industrial production has been
showing stability since the second last quarter of last
year, retail sector sales are showing the fi rst signs of
deceleration and apparent consumption of machinery
DEPEC
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