Brazil's inflation remains under pressure

The recent inflation prints in Brazil surprised on the upside, as food prices seasonally experience a decrease between the months of May and July, driving headline inflation lower. 

This year, however, food prices' monthly increases average 0.97%, according to the IPCA- 15 inflation print released this week. This compares with an average of 0.35% in the same months of last year and 0.19% for that period in 2013. That said, the monthly headline IPCA-15 inflation averaged 0.73% in the past three months, in contrast to 0.41% in the same period in 2014 and 0.30% two years ago. That said, the y/y IPCA-15 released this week moved up to 9.25% from 8.80% in June. 

According to Barclays two essential driving factors of the food inflation in Brazil are the fiscal adjustment and the exchange rate. 

• If at the beginning of the year the electric energy price adjustments drove regulated prices up to 13% y/y (from 5.7% at the end of 2014), now other adjustments in the fiscal consolidation context, such as lottery prices, are applying upward pressure to inflation releases. 
  
  
• The second one is exchange rate weakening. The bank says, the current economic team will let the BRL depreciate in order to absorb the growth recession and reduce the current account deficit, and the reduction in the rollover of the swaps operation supports their view.