Price indexes and the reformation of the economic partnership

The Producer Price Index (CPI) and the Consumer Price Index (CPI) are economic indicators that calculate the change in the price of a group of goods and services. The CPI shows the difference in the prices of products at the first point of sale after production, while the CPI shows the change in the price level of goods and services used by retail consumers for personal consumption.

Based on this relationship that they have between each other, the two indices are dependent on the market/economy as a whole, because the CPI includes changes in prices for goods and services throughout the production chain, reflecting not only increases in prices retail, but also increases in the costs of raw materials.

When manufacturers face increased raw material costs, they often choose to pass them on to customers in the form of price increases. In such a case, this increase in production prices is associated with higher prices for consumption.

So, CPI includes the prices paid by consumers for imported goods and services, while PPI includes prices from domestic producers.

The table below provides data for three price indicators for the same goods and products, (a) in import, (b) in production, (c) in the retail market.

This comparative summary between the two periods of indicative levels in the columns below presents the line of the price chain from the moment of their entry in bulk, where a part of them goes as raw material for production to be sold in the domestic market and the prices that are presented in the retail market.

In the case of the comparative table between import, production and consumption prices, for the first quarter of 2024 compared to the first quarter of 2023, we clarify that:

– we have an increase in CPI,

– prices of imported goods are falling,

– then the market must introduce consumer prices with lower growth than production prices, or there would be no growth.

In this reasoning, it is necessary to add the price of the workforce, which has increased for the same comparative periods by 13.8% in total. Meanwhile, for agricultural products and the manufacturing industry, it has increased by 12.9%.

Taxes and taxes in the first quarter of 2024 have also increased by up to 12% for labor taxes (tax on wages and contributions), as well as the increase in profit tax on average by at least 4% compared to the first quarter of 2023.

Of course, in the increase of the average tax weight, there is a reduction of their effect due to the informality present in 1/3 of the economy, which is understood with an incomplete implementation of the effects calculated as above.

From the indicators in the table, we see that this tendency has not worked and is reflected according to the conventional colors, where in red are those that are seen not to coincide with our reasoning and in green are those that seem to be in acceptable logic.

The first justification is based on the level of coverage of the items that make up the indices.. Thus, the CPI as a very broad index (as it includes goods and services from the entire production chain, including raw materials, intermediate production and retail sales) does not fully correspond to the CPI, which reflects the prices paid by consumers for a fixed basket of goods and services, including imports.

For this reason, in this comparison, we have also set the import prices for the same goods and products.

Following the logic based on the reasoning as above, the market has reacted differently for all the products of the processing industry as an average, but with differences for some certain products that have influenced this trend not according to the logic we mentioned above.

Let’s take a case to explain the dynamics that accompanied the price from import to consumer.

Food products have a 2.9% drop in import prices in 2024 vs. 2023 (quarter on quarter), but have a 4.5% increase in producer prices and a 2.8% higher retail price. So, to a noticeable extent, even though the growth of retail prices is lower than that of production, the impact of import has been absorbed in this case by production and trade.

The explanation for the case above is also valid for other cases, despite the fact that a more detailed analysis would provide more complete and exhaustive reasoning.

However, these differences exist because the indices are intended to show different aspects of economic activity. The producer price index is an indicator of real growth, although it does not in itself justify inflated sources of income. Meanwhile, what we want to use in the logic of this comparison is that consumer prices, which are based on the two indicative indices above (import prices and production prices) give us a preliminary understanding of changes in the cost of living, realizing that where to intervene to calibrate sources of income and expenditure.

In closing this reasoning on the index indicators for the first quarters of 2024 and 2023, we think first, if the prices charged by producers for goods and services will increase, then the prices paid by consumers will also increase, although not in this price trend can happen in any case.

Motivated by the facts, where imported goods and raw materials play a dominant role in transmitting exchange rate shocks to domestic prices, the analysis also suggests that in imported inputs the cost pass-through to domestic production prices is at the highest levels. historical lows in recent decades.

In this process, we see that some of the domestic products in a following line of prices have an inflation of value that is presented in the retail market, which comes as a result of the lack of control in the entire chain of added value creation , but is aided to a dominant extent by the level of informality that interrupts real cost tracking along the entire supply chain.

It is clear that the effective labor cost variable for each stage of the chain plays some role in these comparative periods, reflecting measures that are largely reflected in highly formalized businesses. Second, we note that the forward-looking coefficients of the estimated cost of taxes and rising taxes in 2024 (including the costs of the corruption tax) tend to be less visible in official statistics. But it should be mentioned that the short-term cost pass-through rate from these tax costs is at a level of up to 90% in most formal businesses, decreasing in the following periods due to absorption by the entire value chain of goods and products, which include and other costs related to service providers and other expenses.

From what is understood with the influencing trend of import prices on producer prices and directly on the market, in the last two years there is also the effect of the destabilization of the exchange rate and the uncertainties associated with the partially free market and economy and with continuous intervention by government and informal money tolerated by the incompetence or capture of institutions.

In this brief non-exhaustive analysis regarding the impacts of external and internal factors on production costs and consumer prices, the burden remains to be addressed by institutions and by dialogue with market actors to convey a new spirit of trust and reciprocity, or in other words a new economic partnership agreement.