Brazil: Core inflation trends around 2% impart downside risks for inflation - Rabobank

Brazil’s incoming data continues to evidence a broad-based inflation slowdown, on the back of huge slacks, anchored expectations, favourable inertia, easy FX, food deflations, according to analysts at Rabobank.

Key Quotes

“The IPCA – Brazil’s official inflation index – was up 0.32% m/m (2.8% y/y) in February, still lagging the low end of the BCB’s targeted band. The IPCA headline is a very low one for a February, influenced by soft seasonal hikes in education costs (favourable inertia).”

“While annual core measures run at 3.0-3.5% y/y, we calculate that the seasonally adjusted quarterly running rate is just above 2% now. The seasonally adjusted diffusion indexes are moving a full 10 p.p. (more than 1.5 standard deviations) below the historical average.”

“While the sluggishness in some of these figures might be temporary, the increasing evidence of widespread softness in demand- (or policy-) sensitive items do impart further downside risks for inflation projections and interest rate.”

“For 2018, our IPCA number is 3.7% assuming hikes in fuel taxes in Q4 accounting for 0.5 p.p. (i.e. “inflation fundamental” of 3.2%). Policy-wise, the chances for another rate cut in March have definitely risen, as have the downside risk for consensus Selic rate projections for 2019.”