Brazil’s inflation eases in June; remains well ahead of central bank target

Consumer prices in Brazil eased in June, remaining well above the targeted rate of inflation by the central bank. It remained almost double of what the central bank of Brazil had targeted, strictly because of rise in food and health costs.

Annual inflation declined 0.35 percent to 8.84 percent y/y in June from 9.32 percent y/y in May. This was an improvement from May, when inflation hit 9.32 percent, temporarily reversing a three-month falling trend. The Central Bank of Brazil has set a target of 4.5 percent inflation.

Further, inflation at the year's halfway point is now well above the same time in 2015 when it was 6.17 percent. Food and drink prices for June rose 0.71 percent, while health costs were up 0.83 percent, almost half of the previous month's inflation.

The fresh challenge faced by interim President Michel Temer and new central bank Governor Ilan Goldfajn is that of bloated inflation. The duo is battling to restore confidence in the sputtering economy. However, Brazilian policymakers are facing the twin problems of rising inflation, coupled with shrinking economy, which grew by only 3.8 percent in 2015, registering the worst figure in almost 25 years.

"We expect lower pressure from regulated prices and the contraction in domestic demand to continue to drive it down over 2H16 and 2017," BBVA Research said in a recent note.

Meanwhile, President Dilma Rousseff has been suspended and is facing an impeachment trial on charges of fiddling with the government's accounts, and a massive corruption scandal that has shaken the political establishment of the country.