Brazil’s annual inflation rate slows in July to lowest since 1999

Brazilian consumer price inflation has reached the lowest level since 1999 in July and is in sharp contrast to the double-digit levels from early 2016. Consumer price inflation significantly surprised to the downside in recent months. It slowed to just 2.7 percent year-on-year in July. The fall in inflation, if sustained, has the potential to give a considerable stimulus to the ailing economy by raising the purchasing power of consumers and by giving space for additional easing of monetary policy, noted Nordea Bank in a research report.

“We now have 200 bp additional rate cuts in our forecast, which would take the Selic target rate to par with the lowest level on record at 7.25%”, added Nordea Bank.

In recent months, momentum in consumer prices has been quite low, implying that inflation might be heading even lower. It is mostly goods prices that have been rising gradually and particularly tradable goods. Services prices are continuing to rise faster than the inflation target.

Very low momentum in tradable goods also implies that the exchange rate has a vital role. Firstly, the pass-through from the weakening of the Brazilian real from mid-2014 to early-2016 to double-digit inflation. And then from early 2016 to early 2017, the pass-through from the subsequent strengthening of the Brazilian real.

The strengthening of the real in 2016 has aided in taking inflation down; however, that impact is expected to be over. Inflation might drop in the next couple of months; however, it is then likely to rise slowly to towards target as the economy rebounds gradually.

“We still believe rate cuts will be front-loaded due to the significant drop in inflation already. We expect a 100 bp at the September meeting and the two times 50 bp cuts in the last two meetings of the year contingent on the approval of the pension reform”, added Nordea Bank.

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