Brazilian inflation likely to further slow down on decelerating food inflation

Brazil’s inflation is likely to further slowdown as food inflation has also started to decelerate. Inflation’s broad trajectory continues to be downward given the base effect and stabilizing Brazilian real, said Societe Generale in a research report. Brazil had recorded 9.32 percent year-on-year IPCA inflation in May, which was a tad higher than April’s reading but lower than the IPCA-15 series that indicated inflation accelerating to 9.62 percent through mid-May.

“We expect the IPCA-15 series-based inflation (which captures prices for the 30 days ending in the middle of the month of reporting) to fall to 9.25% yoy (0.65% mom) in June,” noted Societe Generale.

However, personal care and health inflation continued to accelerate in May, while housing inflation unexpectedly rose to 7.62 percent year-on-year from 7.02 percent. Furthermore, food inflation continues to be quite high in spite of the slowdown in May. It will take some time for the Brazilian inflation to decelerate to the Central Bank of Brazil’s target range of 4.5 percent, plus or minus 1.5 percent for 2017.

Additionally, next year’s inflation trajectory has become more uncertain due to the lack of base effect and also because a host of external and domestic factors determining inflation expectations might be unfavourable. The moderation in inflation expectations is becoming slightly excessive. However, it might have certain impact on actual inflation next year.

However, the deteriorating output gap and labor market have guaranteed that the second degree impact of 2015’s high inflation continues to be curbed. Apart from lower commodity prices and their effect on the Brazilian real, structural bottlenecks in the country’s economy has also led to high inflation.