Brazil’s inflation moderation pace likely to have been affected by higher gas prices in December

Brazil’s inflation moderation pace might have been impacted briefly due to higher gas prices. While monthly IPCA inflation had decelerated to 6.99 percent year-on-year in November, the decision of Petrobras to hike gas prices would begin impacting transportation and the fuel components of the IPCA-15 series beginning with the December release, noted Societe Generale in a research report.

In spite of the possibility of continued moderation in the overall pace of inflation, the December IPCA-15 inflation is expected to come in at 7.02 percent year-on-year, added Societe Generale. Full month inflation would be considerably lower at around 6.6 percent year-on-year as compared with the earlier projection of slightly below 7 percent.

The widespread nature of the inflation slowdown signifies that economy-wide factors, such as Brazilian real’s appreciation in 2016, demand weakness and labor market deterioration have assisted in easing prices, although at least part of the slowdown is still because of the base effect.

“We currently expect inflation to fall to 5.6 percent yoy by the end of 2017”, said Societe Generale.

The intensity and prospect of fiscal consolidation is one main upside risk to the medium-term inflation outlook. The risk of food inflation has not subsided totally, but structural challenges such as high wages and the low fiscal balance continue to be pertinent. More phases of upside surprises in the next few quarters are expected, especially when the base impacts in regulated prices ebb, stated Societe Generale.