Brazil’s inflation to continue subsiding at slower pace this year and next

Brazil’s IPCA inflation in August had accelerated to 8.97 percent year-on-year from July’s 8.74 percent. This was the strongest reversal in the inflation trend since deceleration started in February 2016. Inflation had peaked at 10.71 percent year-on-year in January. While most of the upside surprise was from  the continued sharp increase in prices of food and transport, inflation accelerated in each of the categories with a double-digit weight in the IPCA inflation, noted Societe Generale in a research note.

It is evident that the issue is no longer restricted at food inflation. The fact that the slowdown in inflation has stalled in a phase when the Brazilian real has began appreciating year-on-year adds to the surprise, stated Societe Generale.

“We expect that this surprise will not last more than one or two months given the weakening of demand and the labour market”, added Societe Generale.

But the near-to-medium-term outlook for food inflation is quite uncertain, mostly due to weather-related disturbances, and might add more upside rise to the recently revised inflation projections.

“For the mid-month series, we expect inflation to have risen from 8.95 percent yoy to 9.02 percent”, said Societe Generale.

Even if inflation appears set to slowdown in the near-to-medium term on base effects, demand and labor market weakness and the persistent impact of monetary tightening, it is expected to remain above the central bank’s target range in the coming 12 months. The inflation trajectory for 2017 is a bit more uncertain due to absence of any base effect and the uncertainty regarding fiscal outlook. But a stronger BRL, the considerable output gap and weak labor market suggests that inflation will slowdown further next year.

“Overall, we expect inflation to continue subsiding this year and next, but at a slower pace than is generally expected”, noted Societe Generale.