Brazil set for August deflation as energy discounts and food prices ease pressure
Brazil’s consumer price index (IPCA) is expected to have fallen 0.15% from July to August, according to a Reuters poll of 22 economists carried out between September 3 and 8.
Official data is expected to be released on Wednesday, according to Reuters.
It would be the first technical decline since August 2024, when the index fell by 0.02% and before that, in June 2023, when it decreased by 0.08%.
In August, inflation on a year-on-year basis is expected at 5.09%, the lowest since February but above the central bank’s 3% target, which has a 1.5 percentage points tolerance range.
Electricity discounts and food costs drive the decline
The primary cause of the predicted monthly fall is a temporary reduction in electricity bills.
A special one-time discount was imposed in August as a result of surplus revenue from the Itaipu hydroelectric dam, which was earlier identified in mid-month official data.
Food prices also fell, helping to push the index lower. Industrial goods prices moved more moderately, continuing the trend of restrained price dynamics seen earlier this year.
This broad alleviation in major categories has been aided by the appreciation of Brazil’s real currency, which has risen significantly following instability late in 2024.
The stronger exchange rate has lowered imported inflationary pressures and contributed to more stable domestic pricing dynamics.
Persistent pressure in the services sector
Despite a positive trend in headline inflation, several categories remain stuck. Services inflation remains over goal, at about 6% annually.
Policymakers have long been concerned about the durability of price pressures in this market area.
These trends are supported by a strong labour market. Brazil’s jobless rate fell to its lowest level since records began in 2012, boosting household demand while keeping service charges high.
These structural constraints underline the unequal nature of Brazil’s disinflation, raising concerns about how quickly consumer prices will converge to the official target.
Implications for monetary policy
With the Selic benchmark interest rate at 15%, the central bank has been cautious in recent months and maintained the rate in August.
It follows a year earlier aggressive rate hiking cycle of 450 basis points aimed at containing inflation risk.
Although the August drop is expected to boost expectations of an upcoming policy easing, economists warn that persistent services inflation and rising inflation expectations over target may complicate the issue of successfully timing rate cuts.
This would delay many forecasters’ expectations of an era of rate cuts to later during the second half of 2025.
But weaker-than-expected disinflation forced a rethink about monetary easing, and some now see the start pushed back to 2026.
Outlook: temporary relief, lingering challenges
The electricity discount related to Itaipu should expire in September, taking with it one of the elements responsible for the negative August reading, expected to be released in the coming days. Accordingly, deflationary dynamics are unlikely to last long.
However, the reprieve provided by food and energy costs is just that and will not make the central bank’s job any easier.
While the temporary relief is clear, persistent underlying core pressures will remain ingrained, as evidenced by the gap between headline and core pieces of inflation.
The August number will be a critical yardstick for policymakers as they balance the risks of premature easing against the economic drag from holding rates at such elevated levels for an extended period.
The post Brazil set for August deflation as energy discounts and food prices ease pressure appeared first on Invezz
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Brazil’s central bank poised to hold rates at 15% as inflation pressures persist
Brazil set for August deflation as energy discounts and food prices ease pressure
Brazil’s consumer price index (IPCA) is expected to have fallen 0.15% from July to August, according to a Reuters poll of 22 economists carried out between September 3 and 8.
Official data is expected to be released on Wednesday, according to Reuters.
It would be the first technical decline since August 2024, when the index fell by 0.02% and before that, in June 2023, when it decreased by 0.08%.
In August, inflation on a year-on-year basis is expected at 5.09%, the lowest since February but above the central bank’s 3% target, which has a 1.5 percentage points tolerance range.
Electricity discounts and food costs drive the decline
The primary cause of the predicted monthly fall is a temporary reduction in electricity bills.
A special one-time discount was imposed in August as a result of surplus revenue from the Itaipu hydroelectric dam, which was earlier identified in mid-month official data.
Food prices also fell, helping to push the index lower. Industrial goods prices moved more moderately, continuing the trend of restrained price dynamics seen earlier this year.
This broad alleviation in major categories has been aided by the appreciation of Brazil’s real currency, which has risen significantly following instability late in 2024.
The stronger exchange rate has lowered imported inflationary pressures and contributed to more stable domestic pricing dynamics.
Persistent pressure in the services sector
Despite a positive trend in headline inflation, several categories remain stuck. Services inflation remains over goal, at about 6% annually.
Policymakers have long been concerned about the durability of price pressures in this market area.
These trends are supported by a strong labour market. Brazil’s jobless rate fell to its lowest level since records began in 2012, boosting household demand while keeping service charges high.
These structural constraints underline the unequal nature of Brazil’s disinflation, raising concerns about how quickly consumer prices will converge to the official target.
Implications for monetary policy
With the Selic benchmark interest rate at 15%, the central bank has been cautious in recent months and maintained the rate in August.
It follows a year earlier aggressive rate hiking cycle of 450 basis points aimed at containing inflation risk.
Although the August drop is expected to boost expectations of an upcoming policy easing, economists warn that persistent services inflation and rising inflation expectations over target may complicate the issue of successfully timing rate cuts.
This would delay many forecasters’ expectations of an era of rate cuts to later during the second half of 2025.
But weaker-than-expected disinflation forced a rethink about monetary easing, and some now see the start pushed back to 2026.
Outlook: temporary relief, lingering challenges
The electricity discount related to Itaipu should expire in September, taking with it one of the elements responsible for the negative August reading, expected to be released in the coming days. Accordingly, deflationary dynamics are unlikely to last long.
However, the reprieve provided by food and energy costs is just that and will not make the central bank’s job any easier.
While the temporary relief is clear, persistent underlying core pressures will remain ingrained, as evidenced by the gap between headline and core pieces of inflation.
The August number will be a critical yardstick for policymakers as they balance the risks of premature easing against the economic drag from holding rates at such elevated levels for an extended period.
The post Brazil set for August deflation as energy discounts and food prices ease pressure appeared first on Invezz
Read More
Bank of Canada set to cut rates as jobs data, trade hit economy