Brazil's inflation trending upward on fundamentals

Inflation has been on an upward trajectory since 2009 (for a number of structural reasons - labour market rigidities and low productivity growth, low domestic savings and fiscal profligacy). 

Even after assuming that real interest rates will not fall from their current levels and that the output gap will widen sharply starting in Q2, estimates Societe Generale. The medium-term inflation trajectory appears closely dependent on the BRL movement and the current inflation and/or inflation expectations (which are shaped by the current inflation, the fiscal trajectory, the BRL movement and the perception about the BCB's ability to contain inflation). Upside risk to inflation also implies upside risks to peak Selic rate.

"Despite the possibility of the base effect leading to inflation moderation in 2016 (current forecast is 6.3%), we note that structurally higher prices would be difficult to tame in such a short timespan particularly when the BRL remains under pressure due to domestic and external reasons and trend inflation is already threatening to surpass the BCB's target ceiling. Given this situation, the upside risks to our cyclically peak Selic rate forecast of 14.50% continue to rise", says Societe Generale.