February is expected to have been the last month Brazil's inflation accelerated given that the surge in regulated segments of housing inflation was executed in March. Hence, base effect is likely to eventually help inflation from March. However, in the past few months, inflation numbers have disproved the view that the base effect alone will be enough to moderate inflation in 2016. In hindsight, it is not difficult to explain the reasons.

Even though the adjustments to regulated prices in housing segment are over, it is not the same case for transport prices. The uncertainty regarding the extent of adjustments to regulated transport prices continue, mainly under a deteriorating fiscal situation. Furthermore, food prices are expected to be the key challenge for inflation. In January, food inflation accelerated to 12.9% y/y.

 A combination of factors, such as high inflation expectations, costlier imports due to BRL depreciation and higher transport inflation-led costs has resulted in a sharp rise in food inflation. This is not expected to start moderating before Q2 due to the base effect. Inflation numbers through mid-February imply that inflation accelerated in February and the upside threat to inflation continues to increase.

"For the full month of February we track inflation at 10.87% yoy (1.37% mom)", says Societe Generale.

Inflation is expected to have a grim outlook under several assumptions. In fact, inflation is unlikely to moderate to the central bank's target range by the end of 2017 under any other assumption except sharp appreciation of BRL. However, with the fiscal situation, it is highly unlikely for the real to appreciate. Hence, there is a high possibility that inflation will not reach the target range throughout the policy horizon.