Brazil sees inflation cool as tax cuts bring down transportation costs

FAN Editor

Brazilian consumer prices fell in the month to mid-August thanks to lower fuel prices on the back of tax cuts, the country’s IBGE statistics agency said on Wednesday.

Brazil’s IPCA-15 index fell 0.73% in the period, compared to a 0.13% rise in the previous month, maintaining the downward trend reported for the full month of July as well.

It was the lowest rate recorded since mid-month inflation measurements began in November 1991. Economists polled by Reuters had expected an even deeper drop of 0.81%.

Brazil reported the figure in deflation territory as transportation prices continue to fall on the back of federal legislation cutting taxes on fuel and fresh price cuts by state-run oil company Petrobras.

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Lower fuel prices are seen as key for President Jair Bolsonaro’s prospects of re-election in October. The far-right incumbent trails former leftist President Luiz Inacio Lula da Silva in opinion polls.

According to IBGE, transportation costs fell 5.24% in the period on lower gasoline and ethanol prices, but were partially offset by a 1.12% rise in food and beverage costs due to soaring milk prices.

Brazilian gas station

Brazilians are finally able to relax at the pump as tax cuts have helped to bring down Brazil’s soaring gas prices. Picture taken at a gas station in Rio de Janeiro, Brazil, on March 10, 2021.  (REUTERS/Pilar Olivares/File Photo / Reuters)

Kimberley Sperrfechter, an emerging markets economist at Capital Economics, said the headline rate masked the fact that underlying price pressures remained strong, driven by non-energy categories.

Inflation hit 9.6% in the 12 months to mid-August, while market expectations stood at 9.5%, still far above the central bank’s target of 3.5%, plus or minus 1.5 percentage points.

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Central bank chief Roberto Campos Neto on Tuesday said inflation would reach 6.5% or “a little lower” this year, but noted there would be “a payback” in 2023 as some of the government measures will expire in December.

Brazil’s central bank has hiked its key interest rate to 13.75% from a record low of 2% in March 2021, but showed signs the aggressive tightening could stop in September.

Pantheon Macroeconomics’ chief Latin America economist Andres Abadia noted that inflation expectations have followed the recent downtrend, potentially helping the central bank to “keep the main rate on hold over the coming meetings.”

But Capital’s Sperrfechter said the bigger picture showing strong core price pressures and growing fiscal risks kept a final 25 basis-point hike on the table, with a tight monetary policy for a prolonged period.

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Earlier on Wednesday, Mexico reported inflation still on an uptrend, drawing calls for additional rate hikes there.

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