Brazil's inflation acceleration continues in Q3

While mom prices rose 0.62% in July, less than the 0.79% mom in June, annual inflation jumped to 9.56% yoy from 8.89% yoy in June. The acceleration was quite broad-based with the mom rate of price change exceeding their respective values from the same month last year in six out of nine major spending categories.

This comparison is worth mentioning to negate the effect of seasonality and suggests that inflation is also being driven by structural factors (such as high unit labour costs, BRL depreciation and structural bottlenecks), quite apart from the rise in administered inflation and the slightly surprising increase in food inflation. Among the key segments, food inflation (10.5% yoy) entered double-digit territory after nearly two years, while housing inflation (18.3% yoy) soared to its highest level in more than a decade and transport inflation (8.6% yoy) was the highest seen since 2006.

The recent movement in the components and the initial weekly releases of other price indicators lead us to project mid-month IPCA-15 inflation at 9.72% yoy in August. 

The aforementioned factors mean upside risks to the near-term inflation outlook have risen further above the revision to the inflation forecasts. In fact, based on the current pace of acceleration, full-year inflation is expected to exceed 9.0% yoy in 2015. The additional inflation may be attributed to the effect of price adjustments and the 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. Both these factors and the significant pressure on the BRL mean an upside risk to the forecast that the Selic rate will peak at 14.50% in Q3 15 despite the change in the BCB's language at the last Copom.