Inflation on a Steep Downward Path

BRAZIL ECONOMICS - Report 23 Jan 2017 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

The most recent results show that, after all, there is nothing wrong with Brazilian inflation. In the second half of 2016, claims were frequently heard that Brazil suffered from a serious pathology – the strong inflation inertia – which kept prices rising steeply even during a long and deep recession. Perhaps influenced by a defect in the communication from the Central Bank, inducing the conclusion that it gave huge weight to a particular service price inflation index, the financial market refused to accept that inflation could decline sufficiently to allow hastening the monetary easing pace. The diagnosis was wrong! The most recent numbers show disseminated deceleration of inflation, with clear evidence of the impact of the recession on prices. Confidence is growing that the IPCA will close this year near the central target of 4.5%, allowing the Central Bank to maintain the fast pace of cutting the SELIC rate in the next few COPOM meetings, accumulating stimuli that further ahead will favor renewed economic growth.

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