Brazilian inflation likely to have accelerated slightly in May

Inflation in Brazil for the entire May month is expected to have slightly accelerated to 9.33% y/y due to strong inflation in personal care categories and food and health, said Societe Generale in a research report. In the prior month, Brazil had recorded IPCA inflation of 9.28%, whereas for mid-May, the print had accelerated to 9.62% y/y. The base effects emerged from adjustments to regulated prices in 2015 that pushed annual inflation up until January 2016. However, there are certain concerns.

The rise in mid-May inflation indicates that there is a high possibility that inflation in 2016 will remain more than 7%. And, the path for inflation for next year is quite uncertain given the absence of any base effect and the fact that several external and domestic factors determining inflation expectations might be unfavorable.

However, inflation expectations have fallen significantly for the year ahead since the end of February. This is partially because of the Brazilian real’s appreciation and partially due to moderation of inflation itself. The output gap and deteriorating labor market have made sure that the second-degree impact of high inflation of last year continues to be slightly contained.

For a few years, Brazil’ inflation has been steadily on an upward path. Apart from lower commodity prices and their effect on the BRL decline, structural bottlenecks in the economy have also led to rising inflation. The bottlenecks include rigidities in labor market, lower domestic savings and infrastructural deficiencies, noted Societe Generale.