The Recent Inflation Trend

BRAZIL ECONOMICS - Report 13 Jun 2016 by Marcelo Gazzano, Caio Carbone, Cristina Pinotti and Affonso Pastore

After a brief period of deceleration, the 12-month IPCA increased again in May. This does not represent a trend reversal, indicative of renewed inflationary pressures. The tendency is for inflation to continue waning. Nevertheless, the probability is very high that the 12-month IPCA will close the year above the top of the target interval of 6.5%, and although clearly falling, will not reach the central target of 4.5% in 2017.

The IPCA in May was 0.78%, bringing the cumulative figure over the previous 12 months to 9.32%, against 9.28% at the end of April. The data in Graph 1 show that this rise was led by administered prices, but was also strongly influenced by the dynamic of market prices. Five factors will keep the 12-month IPCA rate above 6.5% in 2016: the strong inertia; the belated pass-through from the exchange rate; the increase of food prices; higher taxes; and changes in the method of tallying some components of the IPCA.

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