Inflation: When Will it Start to Fall More Intensely?

BRAZIL ECONOMICS - Report 15 Aug 2016 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

​With the Central Bank firmly indicating it will pursue the 4.5% target in 2017, the inflation expectations measured in the Focus survey for that year have declined steeply, and the downward effect on real inflation is enhanced by the large negative GDP gap. Why against this favorable backdrop is inflation not falling faster? One reason is food prices, which due to a supply shock have pushed up the 12-month increase of non-durables prices (in which foods have substantial weight) to nearly 15%. The other main factor is the strong buoyancy of service prices. In this report, we examine these two movements in more detail, and indicate that the probability is high, at least in the case of foods, that prices will fall in the coming months.

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