Brazil’s July inflation likely moderated to 8.81 pct, expected to continue to fall this year

Brazil’s IPCA inflation has slowed to 8.84 percent in June from January’s 10.71 percent as housing inflation collapsed to 7.38 percent due to a strong base effect.

The slowdown in inflation took place despite the fact that food and health & personal care inflation continued to be higher in 2016. Even if June’s data implied that food inflation had finally begun slowing that could have signified a steeper moderation in overall inflation for the rest of 2016, the mid-July IPCA-15 series indicated a reversal in food inflation. The IPCA-15 inflation had risen sharply in July to 8.93 percent year-on-year.

“We now see full-month inflation moderating only modestly to 8.81 percent yoy in July while the year-end inflation is currently ticking at 7.6 percent yoy (as against our previous reading of 7.1 percent). Overall, we expect inflation to continue subsiding this year and next year, but at a lesser pace,” said Societe Generale in a research note.

The path of inflation for next year is a bit more uncertain given the lack of any base effect and because a series of domestic and external factors have dropped significantly that might be unfavorable. But the Brazilian real’s recent appreciation, if sustain, might put additional downside risk to the inflation’s medium-term outlook, stated Societe Generale.

Furthermore, the considerable and worsening output gap and deteriorating labor market have made sure that the second-degree effect of high 2015 inflation continues to be contained.