The worst water crisis in Brazil in nearly a century has led to increased inflation that resonates throughout the economy, posing an additional challenge for the central bank and another obstacle for the re-election of President Jair Bolsonaro. Electricity bills are likely to rise by up to 15% next month, as the severe drop in water levels in hydroelectric reservoirs forces the government to resort to more expensive gas, diesel, or coal power plants, according to calculations by the Brazilian Getulio Vargas Foundation. Food prices are also rising as farmers lose part of their crops due to the drought.
These issues already create a crisis in a country where annual inflation exceeds 8%, the fastest in five years and more than double the central bank's target, according to Bloomberg, which was reviewed by Al Arabiya. XP Investimentos SA estimates that it will account for one percentage point of price increases this year. However, the situation in Brazil is more complex because the government has postponed part of the annual increases that energy distributors are entitled to, in an attempt to mitigate the economic impact of the pandemic.
Adriano Peres, director of the Brazilian Infrastructure Center, stated: "The government has set a time bomb for 2022, and we need to see how they will handle this." Economists do not have accurate estimates of how much electricity prices will rise next year, as this will depend not only on the weather—which is critical in a country that relies on hydroelectric plants for up to 70% of its electricity—but also on how the government will manage the rising cost pressures stemming from the increasing use of thermal power.
Rainfall in Brazil this year has been the rarest since data began to be recorded in 1931.
**Inflation Problem**
Inflation in Brazil is expected to end at 5.9% in 2021 and 3.78% in 2022, above targets of 3.75% and 3.5% for each year respectively, according to economists surveyed by the central bank. In an effort to curb such expectations, policymakers have left the door open for a larger increase in the benchmark interest rate in August, following three consecutive hikes of 75 basis points each.
