Brazil's August inflation likely peaked

Brazil's inflation data for August is likely to release today. The August inflation release was a clear downside indicator to the 2015 inflation forecast of 9.0%.

"Given the recent price momentum in several spending categories, it is increasingly likely that full inflation will be closer to 8.8% as against the current forecasts. The IPCA-15 series would probably show inflation rising to 9.64% yoy (0.45% mom) through mid-September. That said, the full month IPCA series will likely moderate (compared with August inflation at 9.53% yoy) in September", says Societe Generale.   

Inflation deceleration in Q4 will be mild and more significant moderation will have to wait until Q1 next year when the base effect kicks in for a few spending categories (housing being the most critical). Over the medium term, there is considerable possibility of inflation remaining higher than the BCB's target ceiling, which should be brought down to 6.0% from 6.5% currently. The key upside risks in this regard are the passthrough effects of BRL depreciation and surprisingly strong food prices.

Recent movements apart, the in-sample forecasts from the structural inflation models put Q2 inflation at 7.0-7.2%, i.e. much lower than observed inflation, added SocGen. Additional inflation may be attributed to the effect of price adjustments and upside shock to food prices. However, while escalating upside risks imply that the medium-term inflation outlook remains considerably uncertain, the model estimates appear to fundamentally confirm a continued surge in trend inflation.