Despite overall improvements, food prices will continue to put pressure on Brazil's inflation in the short term

Short-term inflation relief continues to be an effect of government efforts to bring energy prices down

Despite the latest readings, firms should still expect Brazil’s inflation to average well above central bank targets in 2022 and, to a lesser extent, in 2023. With an improving inflationary outlook, the Central Bank of Brazil will likely adopt a wait-and-see approach until meaningful disinflation is recorded within Brazil’s core inflation, likely toward mid-2023. As a result, the cost of credit should remain stable, but Brazil’s currency should experience slight depreciation in 2023 as continued monetary tightening is expected in key advanced economies. 


Brazil’s consumer price index marked the first deflation in 26 months (-0.68%) MOM in July, and August’s preliminary results highlighted a 0.73% deflation MOM. This result is a combination of not only the central bank’s successive moves to raise the benchmark interest rate (from 2% to 13.75% since March of last year), but also of the government’s efforts to bring energy prices down. The largest drivers of the monthly deflation were recent tax cuts on essential goods and services (ICMS), particularly surrounding energy prices both at the federal and the state levels.  Despite the overall deflation on consumer prices, costs of goods and services continue to grow, with 12 out of 13 basic food items seeing price increases over the past month.

Our View

Most of Brazil’s short-term inflation relief continues to be explained by recent government measures to reduce fuel and electricity taxes and the fresh cuts in gasoline prices enacted by Petrobras in response to lower international Brent oil quotes. While we should continue to see deceleration in Brazil’s annual inflation as it continues feeling the impact of the latest government measures, the largest effects from these tax cuts will begin to fade in subsequent readings. Resilient service activity in H1 and growing pressures on food prices due to rising input producer prices suggest that a meaningful core inflation decline may take time to materialize, limiting the benefit of the inflationary ease on mass consumers.

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