Brazil’s inflation numbers for February indicate an end to acceleration. With the strong base effect, the nation’s inflation is likely to decelerate to single digit in March.
“We expect the annual rate to ease to 9.97% yoy – the lowest level in five months – through midMarch as housing inflation falls sharply”, says Societe Generale.
Through the year, inflation should decelerate, except for an interruption due to seasonal factors. However, inflation is not expected to moderate significantly given the trajectory of high and uncertain food inflation, the persistent uncertainty regarding the path of Brazilian’s real and the degree of pass-through to domestic prices.
An amalgamation of factors such as costlier imports due to real’s depreciation, drought in some areas impacting supply and higher transport inflation-led costs, has resulted in a sharp rise in food inflation. Food inflation is one of the key risks on the upside to inflation expectations. Hence, it is expected that inflation will continue to be more than 7% through 2016.
Brazil’s inflation has a grim outlook under various assumptions. Actually, there inflation is unlikely to moderate to the central bank’s target range by late 2017 under any assumption except a sharp appreciation of the Brazilian real. However, with the fiscal situation, a sharp gain in BRL seems to be highly unlikely. Hence, it is possible that inflation will not reach the BCB’s target range within the medium term.
