Brazil IPCA-15: Unsurprising albeit markedly high inflation print

July IPCA-15 increased 0.59% m/m, coming in slightly below expectations but consistent with an acceleration to 9.25% y/y, from 8.80% in the previous month. Relative to the forecast, there were downside surprises in the apparel group, which printed negatively (-0.06% m/m vs. 0.15% expected) due to a broader sale season than suggested by the daily surveys.

"The average of core inflation measures moved up to 0.84% m/m sa, from 0.79% in June and 0.62% in May. On the other hand, services prices decelerated to 0.56% m/m, from 0.79%, albeit still markedly high at 8.20% y/y. Regulated prices are also softer, at 1.01% m/m, from 1.42%, as lottery price adjustments fade. Finally, the diffusion index moved down to 68.5%, from 71.0%", notes Barclays.

Today's surprise was fairly contained and inflation is still markedly high for the period, therefore only marginally favoring the recent market move to price in a 25bp hike in the Copom meeting next week, in contrast to the expectation of a 50bp increase. It is believed, the downside surprises in growth and labor market prints coupled with the drop of the "vigilant" wording in BCB directors' speeches in recent weeks is prevailing in letting markets expect a slower pace of monetary policy tightening. However, the speech was only marginally changed. Earlier this week, when commenting on the labor market, BCB Director Volpon said that the rise in unemployment rate is only catching up to the growth slowdown in the past years, it is believed that, the current labor market deterioration should not come as a surprise.

On top of that, a newspaper mentioned this morning that, the government decided to change the fiscal primary surplus target to c.0.2% of GDP, from 1.1% current prevailing. A lower fiscal surplus puts more pressure on the monetary policy side, and the assumption of fiscal improvement has being central in the Copom rhetoric. On a speech in London at the end of June, BCB Director Volpon said that inflation has being above the target for the past five years because fiscal policy has being looser than expected. Copom should remain cautious in order to be sure that the improvement in inflation expectations observed until now, due to the tightening in monetary conditions, would not be partially reverted by the slippage in fiscal policy, if the change in fiscal target is confirmed throughout the day, says Barclays.