Brazil's escalating upside risk to the near- and medium-term inflation outlook

Brazil's inflation acceleration continued in Q2 despite the likelihood that adjustments to the prices of regulated goods and services are nearly over. The bulk of the upside surprise in May and June was driven by a higher-than expected rise in food prices, although inflation also continued to accelerate in the housing and transportation segments. 

While housing inflation will likely tick above 18% yoy in June, food inflation likely entered into double digits after a gap of 21 months. Higher food price inflation has been surprising given the decline in global agricultural prices but probably reflects the serious effects of drought in several regions. 

Finally, transportation inflation has averaged nearly 7% this year compared with average inflation of 2.2% in this segment since the beginning of 2012.

"Given the recent most trends in the key components, and particularly in food prices, the upside risks to the near-term inflation trajectory have risen further above 2015 inflation forecast of 8.4%", says Societe Generale.