Brazil IPCA-Underlying inflation on a downtrend, albeit still at high levels

August IPCA surprised slightly to the downside, printing at 0.22% m/m and consistent with an annual increase of 9.53% y/y. In comparison to forecast, there some minor surprises in the housing goods and apparel components. The highlight is that food inflation, after a period of unusual increases between May and July, relative to its seasonal pattern, moved to the negative territory, as expected.

The largest contribution to headline inflation came from personal expenditures, reflecting the 0.53% m/m increase in housekeeping. On the other hand, the strong decline of 24.9% m/m in airfare accounts for the drop in the transportation group.

The average of the three core measures moved lower to 0.54% m/m sa, from 0.86% in July, in line with the lower services (0.32% m/m, from 0.54%) and non-tradeables (-0.01% m/m, from 0.40%) inflation indexes. The regulated prices were lower in August, printing at 0.32% m/m from 1.17%, as energy prices declined during the month.

"We believe that the exchange rate weakening will pressure, to some extent, food inflation in the next few months; however, the downtrend of services and, more broadly core inflation, is consistent with a wider negative output gap and in line with our new growth forecasts. We forecast a 3.2% recession this year, followed by another contraction of 1.5% in 2016. That said, despite the high levels of current inflation, we continue to expect the BCB to keep the Selic rate steady", says Barclays.