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According to economists, among the various political, social, and economic challenges that Lula will face, controlling Brazilian inflation is one of the most important. In this aspect Lula’s government is expected to deal differently with such issue, when compared to what the current Government of Jair Bolsonaro, defeated during the elections, would do.
Official Inflation
The Broad Consumer Price Index (IPCA) – the country’s official inflation indicator – was 7.17% in the 12-month period up to September 2022, after recording a contraction for three consecutive months. Despite the sequence of declines, national inflation for 12 months remains well above the Central Bank’s (BC) target of 3.50%.
Inflationary Pressure
The socioeconomic impacts brought by the Covid-19 pandemic, the increase in spending by the current government and Russia’s war in Ukraine help to explain the inflationary pressure experienced by Brazil.
Governing Style
What can change from Jair Bolsonaro to Lula is the intensity with which inflation will fall, with Lula, prices will probably fall a little less. Experts believe that Bolsonaro has a more liberal view, thus, provides a more modest social aid to the population. Meanwhile, Lula gives more emphasis on helping the poorest, which can maintain Government’s expenses and demand high, because this increases the population’s purchasing power, which can make inflation a little higher.
Impact of Fuel Prices
Throughout the first half of 2022, fuels were the main drivers of inflation, with a series of readjustments practiced by Petrobras as a result of the soaring oil prices in international markets. To solve part of this problem, in June, a law came into force that limits the rates of the Tax on the Circulation of Goods and Products (ICMS) on items considered essential, such as fuel, electricity and communications. For the experts, although the proposal for such legislation came from Bolsonaro, Lula may not change the rules because it could be negative for his government. Even if Petrobras readjusts fuel prices a bit, the impacts on Brazilian inflation should not be so strong, as long as the dollar and oil do not rise sharply again.
Biggest Risk
The biggest inflationary risk is any attempt by Lula’s government to make Brazil grow a lot and fast, which would increase the number of social benefits without respecting the control of public accounts. However, experts consider that Congress and the Senate, essential for the approval of any project, are more inclined to a liberal economic model, which in practice could hold any fiscal mismanagement. On top of that, analysts believe that Lula will adopt a more centered and conciliatory stance during his government and avoid divergences with Congress.
