Brazil’s inflation to continue to slow in 2016

Brazil’s inflation is likely to have decelerated in June. The IPCA-15 series had recorded mid-June inflation of 8.98 percent year-on-year, as compared with the mid-May reading of 9.62 percent year-on-year and the entire May’s figure of 9.32 percent year-on-year. The mid-month and full-month prints indicate that inflation continues to slow in the country. According to the details of these series, the key food inflation component has begun slowing.

Inflation is likely to have started slowing in other category as well in June, with a considerable weighting leading to full-month inflation of 8.71 percent year-on-year and 0.23 percent month-on-month, noted Societe Generale in a research report. In all, inflation is likely to continue slowing in 2016 and 2017. Inflation is expected to reach 7.2 percent year-on-year in the fourth quarter of 2016, added Societe Generale.

The path for inflation in 2017 is a bit uncertain due to the absence of any obvious base effect and the fact that a series of domestic and external factors determining inflation expectations might not be favorable. Inflation is likely to reach 6.4 percent in 2017, according to Societe Generale.

But the recent appreciation of the BRL, if sustained, might add significant risk to the downside to the medium-term inflation outlook. Furthermore, the considerable and declining output gap and deteriorating labor market have made certain that the second-degree effect of high 2015 inflation continues to be contained.

For a few years, inflation has been on an upward trajectory. Even if lower commodity prices and their effects on the Brazilian real’s depreciation have been a huge factor in the past few years, inflation has also been accelerating because of structural bottlenecks in the economy. The bottlenecks include rigidities in labor market, low domestic savings, and infrastructural deficiencies.