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Cheap Air Tickets Help Inflation to Recede in Brazil

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Brazil economy suffers from rising inflation

The Brazilian economy is experiencing high inflationary pressure. Consumer prices in Brazil have increased 0.22% in August as against 0.62% recorded in July 2015. Low or high inflation is not considered good for any economy. Higher inflation affects consumer purchasing power adversely and reduces consumer confidence in the economy. Equity investors also don’t appreciate rising inflation.

The Brazil-focused iShares MSCI Brazil Capped ETF (EWZ) and the iShares MSCI Brazil Small-Cap (EWZS) are down 53% and 61%, respectively, over the past year and are two of the worst-performing ETFs in the emerging economies sector. Petrobras (PBR) and Banco Bradesco (BBD) were down 28.2% and 54.1%, respectively, year-to-date.

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The Brazilian Institute of Geography and Statistics (or IBGE) releases the National Index of Consumer Price (or IPCA) every month. A 0.40% decline in inflation in August may provide some relief to the ailing Brazilian economy. The consumer price index in the last 12 months stood at 9.53% in August. The decline is mainly attributed to a fall in airline ticket prices, which has helped to bring down transport inflation.

Airline stock performance

Airline stocks such as GOL Linhas Aereas Inteligentes (GOL) and United Continental (UAL) are down 3.39% and 1.34%, respectively, whereas LATAM Airlines (LFL) is up 0.39% as of September 10.

With the tightening of monetary and fiscal policies, Brazil is facing structural problems in the economy. Brazil’s GDP (gross domestic product) growth stood at -2.6% YoY (year-over-year). Even the currency has depreciated around 39% against the dollar over the past year. Rising unemployment at 8.3% and higher inflation suggest that the economy is contracting. With corruption scandals surrounding President Dilma Rousseff, investors around the world are taking a cautious stance towards Brazil’s growth prospects.

To find out more about what’s happening on the economic front, refer to September ECB Meeting Hints at More Quantitative Easing.

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