The Central Bank's Herculean Task
The dissent in the last Copom meeting complicated further the work of the Central Bank by accentuating the detachment of inflation expectations from the target in adverse global and domestic scenarios. The favorable reading of IPCA-15, which displayed relatively well-behaved underlying measures, does not change this picture. Inflationary risks remain high, reflecting the deterioration of inflation expectations; the strength of both economic activity and labor market; the rise in risk premia associated with fiscal and monetary policy; and higher interest rates in the United States, increasing the pressure on the exchange rate. PNAD data for April show that the labor market continues to be tight, strengthening faster since the end of last year, in line with the acceleration of economic activity along that period. Within this context, there is little room for the Central Bank to reduce the interest rate, risking further inflation expectations deterioration.
HIGH INFLATION RISKS - Last week, May IPCA-15 recorded an acceleration in the headline index, from 0.21% to 0.44%. There was a great influence of regulated prices, especially gasoline and pharmaceutical products, which explains about half of the monthly change. The effect of the calamity in Rio Grande do Sul has not yet been fully captured in the IPCA-15 due to the difficulty of price collection in the metropolitan region of Porto Alegre. When the use of remote means for collection intensified, around 70% of prices had already been compiled. In addition, items such as vegetables were not included.
Overall, IPCA-15 breakdown indicates a favorable dynamic, especially regarding its underlying measures. The average of the core measures monitored by the Central Bank (graph 1) accelerated in the month, from 0.18% to 0.31%, but the annual change fell to 3.5%, following its downward trend. Meanwhile, Underlying Services inflation (0.31%) decelerated for the fourth consecutive month.
Now read on...
Register to sample a report