Brazil's inflation has peaked; but meaningful moderation will have to wait until next year

Releases through September suggest that inflation acceleration is over. The full month inflation number eased to 9.49% yoy in September from 9.56% in July and 9.53% in August. In fact, the monthly rate of change in prices was lower in August and September 2015 compared with that in 2014 for the same months.

A mild yoy inflation deceleration is likely to continue this year (expecting IPCA-15 to come down from 9.57% yoy to 9.54% yoy through mid-October and a slight fall in full month inflation to 9.48%), but a significant fall in inflation will have to wait until January 2016 when the base effect of regulated price adjustments ends. 

The bulk of the upside surprises over the past few months has been driven by a higher-than expected rise in food prices, although inflation also picked up further in the housing and transportation segments until a couple of months ago. Anticipated inflation moderation on the base effect notwithstanding, given the extent of BRL depreciation, a lagged passthrough impact is expected in several price categories. This is also the key upside risk to the medium-term inflation outlook. 

"Despite lowering our 2015 annual inflation forecast to 8.8% from 9.0%, we recently raised our 2016 and 2017 inflation forecasts by 0.1pp and 0.3pp to 6.6% and 5.8%, respectively", says Societe Generale.

While the effect of slow growth and labour market deterioration could lead to a faster-than-expected slowdown in inflation next year, both the current trajectory and recent history give little ground for confidence in this regard. Inflation will likely remain above the BCB's target over the forecast horizon.