Brazilian inflation seems to have further eased in October, likely to fall to 7 pct by end-2016

Inflation in Brazil is moderating at a stable pace now. The IPCA-15 series indicated that the rate of inflation slowing in September full-month IPCA continued through mid-October, noted Societe Generale. Annual food inflation, in particular, eased further to 12.8 percent year-on-year and inflation in all other categories, excluding communication, dropped.

Therefore, slowdown in inflation is widespread and economy-wide factors, such as real appreciation, labor market deterioration and demand weakness are supportive of inflation moderation in the near to medium term. Furthermore, housing inflation is easing due to strong base effect.

“We expect this trend to have continued in October, prompting a fall in inflation to 7.90 percent yoy (0.28 percent mom)”, added Societe Generale.

Intensity and prospect of fiscal consolidation is one key risk on the upside to the inflation outlook in the medium term. Even if food inflation risk has not waned totally, the structural challenges such as low fiscal balance and high wages continue to be pertinent.

But with the real strengthening in annual terms, inflation is expected to slow down in tradable segments in the coming few months. Moreover, with the prevailing demand weakness and additional easing in housing and transportation inflation, the currency might continue to put downward pressure on overall inflation.

“We now expect inflation to fall to 7 percent in December 2016 and to 5.6 percent yoy towards the end of 2017”, said Societe Generale.