Synthesis of the Brazilian Economy

BRAZIL ECONOMICS - Report 03 Sep 2024 by Alexandre Schwartsman, Cristina Pinotti and Diego Brandao

OVERVIEW

THE RIGHT STUFF VERSUS THE EASY STUFF

The highlight of the month was the relatively fast change in the pricing of monetary policy. Partly due to the harsh language expressed in the July Copom minutes and partly because of statements from members of the Board of Directors (notably Governor Roberto Campos and the newly appointed Governor Gabriel Galípolo), the fixed income market began to incorporate expectations of a rate hike cycle that could push the Selic rate to around 11.50% per year by the end of 2024.
There are legitimate reasons to be concerned about inflationary behavior, both in the recent past and over the Central Bank's relevant horizon (particularly the 12 months ending in March 2026). Recent readings of underlying inflation suggest that its best moment is behind us. The average of core inflation measures has reaccelerated compared to what was observed in the second quarter of the year, as have service prices.
In both cases, there are indications that the persistent decline in spare capacity in the economy, both in the labor market and in the level of utilization of installed capacity in industry (NUCI), is contributing to the acceleration of price increases.
The continuous decline in unemployment has put pressure on real wages, despite some weakness in July, which, so far, remains the exception. The increase in real wages ahead of productivity implies a rise in unit labor costs. In the case of services, or more generally, non-tradable goods, this has translated into price pass-through to consumers, as expressed in underlying service inflation at around 5.0% over the past 12 months.

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