Inflation in Brazil is likely to keep moderating in the second half of the year, given the assumption that food and health and personal consumption inflation have peaked. The IPCA-15 mid-month inflation is expected to have decelerated to 8.46 percent year-on-year in July from June’s 8.98 percent, said Societe Generale in a research report. Inflation in other major spending categories, such as transportation and housing, have already decelerated significantly from their 2015 peaks owing to the base effect.
They are expected to slow further in the second half of 2016, noted Societe Generale. Full month IPCA inflation in Brazil has slowed from a peak of 10.71 percent year-on-year in January to June’s 8.84 percent. The present path of prices is still likely to be insufficient to pull inflation below 7 percent by the end of 2016.
“Beyond the moderation this year, in our view, given the lack of base effect and the structural constraints, inflation is unlikely to fall within the BCB’s target range (4.5 percent +/-1.5 percent for 2017) in 1H 17,” added Societe Generale.
But the persistent growth and deterioration in labor market, along with appreciation of the Brazilian real, would ultimately exert enough downward pressure on inflation in the medium term. Full-year average inflation is expected to reach 8.6 percent this year and 6.4 percent next year, according to Societe Generale. Likely continued fiscal slippages are likely to be a risk on the upside to the medium-term inflation outlook.
