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Brazil Likely to Register Mild Deflation in June, Fueling Expectations of Monetary Easing Cycle

Brazil headed for Mild Deflation in June


Brazil is anticipated to have experienced mild deflation in June due to lower fuel costs and cheaper foodstuffs. The potential decline, which would be the first since September, aligns with the awaited start of a monetary easing cycle, eagerly anticipated by global investors, potentially as early as next month.

The confirmation of this deflationary trend is expected to be announced in a release scheduled for Tuesday. Following President Luiz Inacio Lula da Silva’s election in October, a brief period of falling consumer prices was interrupted. Consequently, any decline in inflation is poised to capture global attention as it may offer insights into future trends for other major economies. Additionally, it could enable Banco Central do Brasil to shift away from its current hawkish approach, similar to that pursued by the U.S. Federal Reserve.

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According to a survey of 13 economists conducted from July 5 to 7, it is estimated that Brazil consumer prices, as measured by the IPCA index, fell by 0.10% in June compared to May. On a yearly basis, inflation is projected to further decelerate to 3.20%, marking its lowest level since September 2020.

Analysts at 4intelligence attribute the downward pressure on the headline figure to a decline in fuel and cooking gas prices, as well as a continuous decrease in wholesale food costs, driven by a record harvest in the first quarter.

Motorists in Brazil have experienced relief at pump stations due to a series of gasoline price cuts implemented by the state-run oil company, Petrobras (PETR4.SA), which has adjusted its pricing strategy to mitigate fuel cost fluctuations. Meanwhile, food prices continue to face downward pressure as Brazil’s agricultural boom threatens U.S. corn export dominance and leads to an overflow of soybeans into Argentina, which is experiencing a decline in its own crop.

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Looking ahead, the inflation outlook for Latin America’s largest economy is gradually improving. According to a central bank survey, market consensus indicates a 4.98% inflation rate for 2023, lower than the 5.36% projection at the beginning of the year.

However, this figure would still surpass the official goal of 3.25%, plus a tolerance margin of 1.5 percentage points in either direction, marking the third consecutive year of overshooting. Recently, the government established a target of 3% for 2026, aligning with the goals for 2024 and 2025.

The decision to aim for a relatively low inflation rate in the long term, coupled with the unexpected appreciation of the local currency this year, may further moderate consumer prices and bring them closer to the target range.

Nonetheless, the primary risk lies in the evolution of the primary deficit under Lula’s government plans to expand welfare spending. This concern arises particularly after Congress postponed a vote on a fiscal framework that is viewed as a crucial commitment to maintaining expenditure control.