Brazil’s Inflation in June: A Story of Decline

Brazil (EWZ) is currently experiencing an uneven recovery from its last two years of recession and high inflation. Inflation has fallen since 2016, due to the positive impact of supply-side factors, including improved agricultural output. Consumer prices in Brazil (BRZU) grew by 3% YoY (year-over-year) in June 2017, compared with 3.6% in May 2017.

Inflation (TIP) in Brazil in June remained slightly below the market expectation of 3.06%—the lowest inflation rate in the last decade—mainly due to a slump in the cost of food and a decline in electricity prices.

Inflation in Brazil (EEM) is on a declining trend in 2017, which has led to the Central Bank of Brazil to slash interest rates by 1% to 10.25% in May. The inflation rate has been slowing for eleven consecutive months due to moderate economic recovery, which is keeping prices at low levels in 2017. Subdued economic activity has also supported the decline in inflation so far in 2017.

A slower pace of interest rate cuts is expected in 2017, as inflation development remains favorable around the central bank’s target. Increased uncertainty concerning the pace of reform implementation and adjustments in the Brazilian (ILF) economy has resulted in a reduced paced of monetary easing. The recent political chaos is Brazil (BZQ) seems to have impacted the growth outlook and related monetary policy decisions.

According to the Central Bank of Brazil, the inflation rate on an annual basis is expected to drop below its target rate of 4.5% by the end of 2017. Inflation expectations are around 3.7% and 4.4% for 2017 and 2018, respectively.

These lower interest rates are expected to encourage consumption, which should help boost Brazil’s (BRAQ) economic recovery in 2017.