Brazil's inflation acceleration nearly over

While Brazil's inflation in market-determined categories has also risen this year, the bulk of the acceleration in the overall IPCA has been caused by adjustments to the regulated prices of petrol and energy to support the government's fiscal austerity efforts and reduce price distortions. IPCA-15 inflation rose to 8.2% yoy through mid-May as prices in the food and healthcare categories rose sharper than expected while housing inflation continued to contribute to the price rise. 

Extrapolating the recent price trends puts full-month IPCA inflation at 8.19% yoy (0.48% mom) in May. More importantly, with the adjustments to regulated prices effectively over, we can now turn back to normal seasonality and cyclical factors to estimate and explain the near-term inflation trajectory - albeit at a revised level of inflation (from 6% to 8%). As a result, inflation is expected to stay around current levels until August before moderating in Q4, according to Societe Generale. For a significant decline, however, we will have to wait until 2016 when the base effect kicks in. 

Societe Generale forecasts full-year inflation at 7.9% this year followed by 6.0% in 2016. This, of course, also assumes that there will be no second-order price acceleration due to wage pressure. Finally, continued pressure on the BRL remains the key medium-term upside risk to our inflation forecasts.