Falling inflation could boost Bolsonaro's reelection chances

The perception in Brazil that inflation is slowing is providing some welcome relief for companies and could become an important factor in President Jair Bolsonaro's reelection bid.

The country's official IPCA inflation index is expected to end this year at 6.82% before falling to 5.33% next year, according to a weekly survey with 100 economists published by the central bank. 

The new forecast for this year is the eighth consecutive weekly reduction in projections by economists, while the lower forecast for next year is the first drop after 19 consecutive hikes in the average inflation forecast. 

"We had a price shock for some inputs, such as steel. Now I already see signs of reversal of this shock, due to the increase in the interest rate," Venilton Tadini, president of Brazilian infrastructure association Abdib, told BNamericas in a recent interview. 

Domestic inflation in Brazil has been seen as one of main points of concern among economic agents in recent quarters, forcing the central bank to increase the Selic base rate rapidly.

Although the inflation predicted by economists is still above the central bank target set for this year and next (3.50% for 2022 and 3.25% for 2023), it would still be significantly better than recent figures. In 2021, inflation reached 10.1%, more than double the 4.52% seen in 2020 and the highest figure seen since 2015.

Because of that, the central bank raised the benchmark rate to the current 13.25%. At the start of 2021, the rate was at just 2.00%, its lowest ever level. 

The perception among Brazilians that inflation is slowing may boost support for President Bolsonaro and help him close the large gap on the front runner in the election polls, former president Luiz Inácio Lula da Silva. 

"The labor market is improving and we already had a month of deflation [in July] and we will probably now have a second month of deflation in August. We also have the effects of [social program] Auxílio Brasil, which helps the candidacy of the incumbent. Because of this, we're less convinced that Lula will win, but he's still the favorite," Christopher Garman, managing director for the Americas at US-based political risk consultancy Eurasia Group, told BNamericas in another interview. 

Bolsonaro is using the recent reduction in inflation as a major factor to convince the electorate to vote for him.

"We're seeing a drastic reduction in inflation thanks to the measures I've taken to reduce fuel taxes," Bolsonaro said during a Monday evening interview with Globo TV.