BRASÍLIA: Brazil’s inflation in January was more than expectations at 10.71% y/y, as compared with December’s 10.67% y/y, disproving the long-held opinion that inflation will moderate in 2016 with just the help of base effect. Indeed, the adjustments to the regulated prices in the housing segment are over, it is not the same in the case for transport prices.
The uncertainty continues regarding the extent of adjustments to regulated transport prices, especially amidst a deteriorating fiscal situation. Furthermore, food prices are expected to be a major challenge for inflation in 2016. In January, food inflation accelerated to 12.9% y/y, the strongest since May 2013.
Food inflation has accelerated due to a combination of factors such as costlier imports after depreciation of BRL, drought in certain areas impacting supply, the environment of generally high inflation expectations and higher transport inflation-led costs. Food inflation is not expected to start moderating before Q2 2016 given the base effect.
Inflation in mid-February is expected to moderate slightly to 10.58% y/y or 1.18% m/m given the trajectory of food prices. However, a grim outlook for inflation is seen under several assumptions. Brazil’s inflation is not seen moderating to the Central Bank of Brazil’s target rate by the end of 2017 under any other assumption except a sharp decline in the Brazilian real.
However, a sharp depreciation of the real is very much unlikely given the fiscal situation. Hence, there is considerable risk that the inflation rate will not reach the target range via the policy horizon.
