Brazil's inflation likely increased to 9.33% yoy in July

Brazil's inflation data for July is expected to release on 7th August. The bulk of the upside surprise appears to be driven by a higher-than-expected rise in food prices, although inflation also continued to accelerate in the housing and transportation segments (primarily a result of adjustments early this year). 

Societe Generale says, "We estimate inflation to have risen to 9.33% yoy in July, although the monthly price increment likely slowed to 0.41% mom. While housing inflation is set to tick above 18% yoy, food inflation likely reached double-digit figures after a gap of 22 months."

This comes as a surprise given the decline in global agricultural prices and probably reflects the effects of drought in several regions. Lastly, transportation inflation has averaged over 7% this year compared to 2.2% since the beginning of 2012. Due to the surprisingly stronger acceleration in food prices over the past three months and the continued rise in regulated goods and services prices, the upside risks to the near-term inflation outlook have risen further above our revision to the inflation forecasts. 

"The in-sample forecasts from our structural inflation models put Q2 inflation at 7.0-7.2%, i.e., much lower than the actual inflation of 9.25% yoy (up to mid-July). However, while escalating upside risks imply that the medium-term inflation outlook remains very uncertain, the model estimates appear to confirm a continued fundamental surge in trend inflation, in part due to significant depreciation of the BRL. Both of these factors create upside risk to our forecast that the Selic rate will peak at 14.50% in Q3 15", estimates SocGen.