Inflation: Headed to the Target with Expectations Anchored

BRAZIL ECONOMICS - Report 13 Nov 2017 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

The 12-month IPCA in October grew for the second straight month, but still remains under the lower limit of the target interval. However, not only does the yield curve have a large positive slope, the slope has risen in the past few weeks. We insist that this behavior is not the consequence of an “inflation premium” derived from excessive easing of monetary policy, but rather a “fiscal/political premium” derived from the difficulties of winning approval of a meaningful pension reform and measures necessary to meet the primary deficit target in 2018, along with the uncertainties over the nature of the next government (reformist or populist). The inflation expectations remain firmly anchored, the projections show 12-month inflation gradually converging to the central target in 2018, and those projections are corroborated by the most recent IPCA data.

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