Inflation begins to weigh more heavily on the middle class

Maintaining a standard of living is becoming more expensive for the middle and upper classes. Data from Ipea shows that rising inflation for services, particularly ride-hailing, rental, and vehicle insurance, increased the cost of living for this segment of the population in June.

The survey indicates that this month, price increases began to weigh more heavily on the middle and upper classes than on the poorest, who until then had been affected by higher rates. There was already significant inflation across all social strata; the difference now is that the rates for the middle and upper segments have become higher.

According to Ipea, the inflation rates for the upper-middle-income and high-income populations were 0.27% and 0.28% in June, respectively, representing an increase compared to May's rates (0.21% and 0.08%). The June rates were higher for these groups than for lower-income families (see the figures below).

Meanwhile, the drop in the price of some foods, after nine months of rising, has slowed the increase in the consumer basket, which directly impacts the lower-income segments of the population. However, from January to June, inflation among the poorest families is still more intense.

According to Matheus Dias, a researcher at the FGV Brazilian Institute of Economics (FGV-Ibre), the numbers reflect the greater influence that food has on the basket of low-income populations, compared to the higher-income population.

For the low-income population, the percentage spent on food is quite high, making increases in the price of these products more harmful to this group.

"The low-income population ends up benefiting from this movement of reduced pressure on food prices, because a significant proportion of their income is dedicated to purchasing food. So, when you see relief in these prices, this segment of the population ends up benefiting," he states.

As income increases, the proportion of food consumption decreases relative to total expenditure. "People don't buy more food because their income has increased. They can become more sophisticated, switching from low-quality products to higher-quality ones, consuming imported items, and switching to premium lines," he said.

Minimum wage and employment put pressure on services inflation

Regarding high inflation in the services sector, one of the main factors is the increase in employment levels and the minimum wage. Because the sector is labor-intensive, there is a rise in costs, which are ultimately passed on to the consumer.

A study by the consulting firm LCA 4intelligence showed that wage increases explain nearly 70% of services inflation. According to the economic consultancy, services inflation is expected to close the year at 5.2%.

Until May, inflation in services had remained under control due to the drop in airfare prices (27.9%), which did not continue in June, when it rose by 0.8%. Furthermore, ride-hailing (13.7%) and car rental (5.5%) also saw increases.

Personal care and housing affected inflation in June

In addition to transportation, rising inflation in other sectors, such as housing, was also decisive in the increase in inflation for the upper-middle and high-income population in June.

The health and personal care group also weighed on inflation in these income brackets, driven by adjustments of 0.51% in health services and 0.57% in health plans.

In 12 months, the highest inflation was in high income

Over the last 12 months, the upper income bracket recorded the highest inflation rate: the average price increase was 5.4%, according to Ipea, compared to 5.24% for those with very low incomes. The price increases observed in personal services (5.5%) and school fees (6.5%) contributed significantly to the index.

Furthermore, price increases in clothing, premium food items, and even jewelry are also impacting higher inflation for the upper-middle and high-income brackets.

Inflation for the poor population was highest between January and June

Even with relief in June, the poorest segment of the population was most affected by inflation from January to June of this year. The Ipea study measures inflation by income bracket and divides families into six groups based on their respective monthly income: very low, low, lower-middle, middle, upper-middle, and high income.

Inflation for each of these bands in June and in the first half of the year was as follows:

• Very low income (family income below R$2,202 per month): inflation of 0.2% in June and 3.19% in the first half of the year
• Low income (R$2,202 to R$3,303): inflation of 0.21% in June and 3.15% in the first half of the year
• Lower-middle income (R$3,303 to R$5,505): inflation of 0.23% in June and 3.09% in the first half of the year
• Average income (R$5,505 to R$11,010): inflation of 0.24% in June and 2.97% in the first half of the year
• Upper-middle income (R$11,010 to R$22,020): inflation of 0.27% in June and 3.04% in the first half of the year
• High income (above R$22,020): inflation of 0.28% in June and 2.58% in the first half of the year

From January to June, inflation among the low-income group (3.2%) was driven by a 3.6% increase in food prices and a 7% increase in electricity prices. The high-income group had the lowest inflation rate (2.6%), benefiting from an average 27.9% drop in airfares during the period.

Price increases remain noticeable for those with lower incomes

Matheus Dias explains that, even though the drop in food prices has brought inflationary relief to lower-income groups, there is not always a noticeable benefit for this segment of the population.

Food inflation has risen almost relentlessly in recent years, driving prices sky-high. "So, it's quite common for lower-income people to claim that, despite the declines, prices are still too high," he says.

The high cost of the basic food basket forces lower-income people to resort to alternatives to maintain their consumption. "Many end up resorting to debt to afford the basic food basket," he explains.

Trump's Tariffs Could Lower Food Prices in Brazil

According to Dias, if the 50% tariffs imposed by Donald Trump on Brazilian products come into effect, they could help reduce food prices in the domestic market. This could occur if food export sectors, in particular, are unable to sell their products.

In this case, instead of going to the US, the products can be directed to the domestic market, and with the increased supply, the price tends to fall. In a way, this is what happened in June: with the increase in harvest and food supply, the price fell.

On the other hand, in relation to manufactured goods, for example, if Brazil establishes a reciprocal tariff on imports from the US, the cost will increase, putting pressure on prices.