Brazil’s mid-November inflation likely to have slowed to 7.6 pct, may fall below 7 pct in December

Brazil’s consumer price inflation has started moderating at a stable pace now. The monthly IPCA inflation had decelerated to 7.87 percent year-on-year in October as food inflation had slowed to 12.4 percent. Inflation had also dropped in each of the major components of the index. Thus the widespread inflation slowdown provides the confidence in the forecast of inflation reaching below 7 percent in December, said Societe Generale in a research note.

“The mid-month IPCA-15 inflation should also decelerate to 7.60 percent yoy vs the previous reading of 8.27 percent”, added Societe Generale.

The widespread nature of the slowdown of inflation implies that the economy-wide factors, such as the Brazilian real’s appreciation in 2016, weakness in demand and the deterioration of labor market have helped ease prices. However, part of the slowdown in still because of the base effect.

“We expect inflation to fall below 7 percent in December 2016 and to 5.6 percent yoy towards the end of 2017”, noted Societe Generale.

The intensity and prospect of fiscal consolidation is one major upside risk to the outlook of inflation in the medium term. While the risk of food inflation has not subsided entirely, the structural challenges such as low fiscal balance and high wages remain pertinent, according to Societe Generale.