How does ICMS affect fuel prices in Brazil?

Brazilian states announced that they will freeze the rate ICMS on fuel for the next 90 days in an effort to contain high diesel and gasoline prices.

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ICMS being levied on fuel has become a major political battle, with President Jair Bolsonaro blaming an increase in ICMS prices at the pump – a tax set and collected by state governments.

The dispute reached Congress, where the House approved a bill that would change the way the tax is calculated, and establish a fixed amount per liter in contrast to the current changing model.

The decision may be an attempt to buy time and prevent the bill from moving forward in the Senate. Any changes in ICMS rates could have a severe impact on state finances, as the tax represents about 85 percent of their total income.

On the other hand, fuel prices have become a discount for politicians’ popularity, with a liter of gasoline exceeding US$7 in most states.

According to official data, fuel has risen by 45 percent over the past 12 months, a major factor in the overall rise in inflation.

HICP

The IPCA jumped 1.25 per cent in October, the highest level since 2002 – when Brazil grappled with uncertainty in that year’s election, which will bring a center-left government to power for the first time. The October result raised the 12-month inflation rate to a staggering 10.67%.

The results were worse than market expectations. According to Reuters, analysts’ expectations were 1.05 percent.

Fuel prices were the main force driving up inflation in October, up 3.21 percent last month. Over the past 12 months, fuel has become 45% more expensive in Brazil.

High-income families began to feel the pinch of inflation – which initially punished poorer families more severely, with rising food and energy prices.

The Minister of Mines and Energy, Pinto Albuquerque, noted that successive increases in fuel prices “will affect the economic activity of the country”, but stressed that changing Petrobras’ pricing policy is not the solution.