Brazilian inflation seems to have decelerated further in December

Brazilian inflation is slowing at sustained pace; however, medium-term uncertainty persists. The overall IPCA-15 inflation dropped to 6.5 percent year-on-year in December from the earlier reading of 7.64 percent and the full-month November print of 6.99 percent. This fall was driven by lower inflation in the food and housing categories.

December IPCA inflation is likely to be impacted by Petrobras’ decision to hike gas prices, stated Societe Generale in a research report. However, given the continued fall in food prices, December IPCA inflation is expected to have come in lower at 6.29 percent year-on-year, quite lower than anticipated a few months ago, added Societe Generale.

Significantly, the slowdown in inflation in the last two to three months has been widespread, signifying that the economy-wide factors such as the appreciation of Brazilian real, weakness in demand and labor market deterioration have all added to easing the price pressure. However, some part of the slowdown is still because of the base effect in the housing segment.

In spite of the recent rate of slowdown in inflation, one major upside risk to the inflation outlook for the medium term is the intensity of prospective fiscal consolidation, noted Societe Generale. Risk of food inflation has not subsided totally, but structural challenges such as low fiscal balance and high wages continue to be pertinent, especially in the light of the November fiscal releases.

“Further upside surprises over the next few quarters are likely, particularly when the obvious base effects in regulated prices ebb and food inflation stabilizes”, added Societe Generale.