July inflation is negative after control of fuel prices by Petrobras and reduction of ICMS taxes by states; despite this, accumulated IPCA is double digits

July, according to previews, had low inflation. However, the service sector is still hampered by not being able to pass on costs. 

Although the percentages have not been officially revealed so far, according to Infomoney last Tuesday, July 26th, the July inflation previews present 0,13% drop after cuts in ICMS taxes and a drop in fuel prices. Economist Fabia Louzada said that the result was so positive and beyond expectations that the last time the country had a similar situation was in 2020. The Extended Consumer Price Index (IPCA-15) showed a 1,5% deflation in the managed values ​​and, if it continues at the same pace, it is estimated that the costs of services and products will decrease again after an intense increase, intensified after the war between Russia and Ukraine. 

A report published by Goldman Sachs shows that the negative inflation in July is a reflection of the reduction of ICMS taxes by some states, as happened with Minas Gerais (MG), in which Zema warned that he would reduce taxes on gasoline to control prices, but expressed concern about the possible impacts that the state decision could have. 

The government of Jair Bolsonaro created, this month,  a project aimed at reducing ICMS charges states, where the federal scale would be responsible for transferring cash values ​​to governments to control fuel prices for consumers. In at least 20 Brazilian states, the value of a liter of gasoline was quoted at more than R$ 7 since last year. 

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Inflation in July: Gasoline drops but diesel value is still worrying

Coastal cities in the state of Santa Catarina (SC) have a liter of gasoline costing around R$5,9. However, despite the drop in the liter, which previously reached R$ 7,5, diesel prices continue to be high and worrying inflation rates and consumer prices, even flirting with the range of R$ 8 and drastically harming the transport sector. Transport companies will close the year with inflation above 10% without being passed on to customers. 

A portion of fuel in Santa Catarina is due to the ICMS tax: Luciano Hang, owner of Havan and gas stations, created zero tax day in the month of June. The entrepreneur was charging only R$4,99 per liter without tax (gasoline was normally close to R$7 at the time) and created kilometer-long queues of customers to fill up their vehicles. Each person could take home up to 15 liters of gasoline. 

With more expensive fuels, truck drivers must pass on freight prices and, with higher freight costs, it is estimated that products will become richer to compensate for the price paid to reach the final consumer, including within the markets. Soon, there is a domino effect on the economy and repeated rise in inflation. 

Political measures approved in July will affect the market more intensely in August and September, says CM Capital 

According to CM Capital, the month of July is suffering from deflation due to recent policies approved by the federal government to reduce taxes. However, they still do not have such significant impacts as they will from August onwards. 

However, as stated by the  Raone Costa, Chief Economist at Alpha Tree, the increase in the prices of services is still lower than that of products, but there is an inertia in the sector, as companies are trying, at all costs, not to pass this variation on to final consumers. Costa argues that this news is not so positive for the economy and that the impacts of this deflation will come in the long term.