Brazil Inflation Seen Grinding to a Halt in August

September 3, 2018 Updated: September 3, 2018

BRASILIA, Brazil—Consumer prices in Brazil likely stagnated in August as a slow economic recovery continued to weigh on employment, a recent poll showed, suggesting the central bank should be in no rush to raise interest rates despite a currency sell-off.

The benchmark IPCA price index probably held flat compared with July, according to the median of 19 forecasts.

It would be the weakest reading since mid-July 2017, highlighting how price pressures remain muted after product shortages stemming from a late-May truckers’ strike normalized. Five economists, in fact, expected an outright decline, with estimates ranging from -0.04 percent to -0.19 percent.

“The effect of the truckers’ strike on food, fuel and energy prices appears to have faded,” economists at BNP Paribas wrote in a report.

That would keep the annual inflation rate, scheduled for release on Aug. 6 at 4.30 percent, the survey showed, the same rate as in mid-August and below the 4.48 percent reading at the end of July.

The reading underscores the central bank’s struggles to reignite price hikes in a weak economy, with the unemployment rate hovering in double digits for months and companies grappling with idle capacity.

Growth picked up slightly in the second quarter despite the truckers’ strike, but downward revisions to previous readings triggered a string of forecast cuts for the year-end figure.

Even the annual inflation forecast in the poll is likely to overstate underlying inflation pressures as scarce rains drove regulators to keep power rates high. When stripped of volatile items such as energy costs, so-called core inflation probably remained at around 3.5 percent, UBS economists estimated.

That is likely to keep the central bank from lifting rates from an all-time low for the time being, even as uneasiness about this year’s presidential election added to an emerging market rout and pushed the Brazilian real to a 2-1/2 year low.

Still, UBS expected core inflation to accelerate gradually as the effect of a weaker currency spreads, driving year-end inflation to reach the midpoint of the official 2018 target range, 4.5 percent.

Central bankers have repeatedly stressed that currency moves will only drive monetary policy insofar as they affect other prices or inflation expectations. According to a weekly central bank survey, economists expect inflation to reach 4.16 percent by year-end.


By Bruno Federowski