Broad-based meltdown in Brazilian inflation - Rabobank

Mauricio Oreng, Senior Brazil Strategist at Rabobank, notes, "Anchored expectations, large economic (and labour) slacks, well-behaved BRL, positive crop output, all point to a favourable inflation print for 2017: we revised down our (long-held) projection by a couple of tenths to 4.4% (mid-target: 4.5%). For now, we keep our call for Selic rate at 10% for end-2017 and 9% for 18H1: but, odds are skewed towards faster, deeper cuts."

Key Quotes

"Brazil’s official inflation index (IPCA) posted the lowest monthly change for a January in more than twenty years, confirming a fast disinflation process. The details show a broad-based slowdown, with both headline and underlying figures posting multi-year lows."

"Group-wise, January results show upward contributions from items previously in deflation, and downward pressures from volatile segments that jumped in December. On one hand, the food group (26% of the headline) rose 0.35% m-o-m and added 7bps more to the headline inflation than in December. Notable gains seen in milk prices (+0.66%). Housing costs (15% of the headline) also provided a bit of thrust to Brazil’s headline CPI, rising 0.17% after a deflation of 0.59% in December, owing to fading effects of previous cuts in electricity costs." 

"On other hand, transportation costs (18% of the headline) rose 0.77% for the month, adding less 6bps to the headline from December, due to a decline in volatile air-ticket costs (-7.36% in January, +26.29% in December). Personal expenses (11% of the headline) gained 0.45% and also reduced in 6bps its contribution from December, as a previous rise in cigarettes was left behind."

"Month after month, the disinflationary effects of this huge Brazilian recession (the worst since 1900s) are getting clearer, as adverse shocks in administered prices and foods costs are fading, left behind or reversed. Naturally, the ongoing inflation decline has a lot to do with the outlook for implementation of major fiscal reforms (curbing the likelihood for fiscal dominance, hyperinflation scenarios for the long term). The tight stance of the BCB in the early days of the new administration also lent a good amount of help, by steering inflation projections towards the mid-target." 

"Looking ahead, we see anchored expectations, large economic (and labour) slacks,well-behaved BRL, tame regulated prices, robust agricultural output. All of those point to a favourable inflation for this year. In fact, owing to recent downside surprises and a favourable inflation composition, we revised down our (long-held) 4.6% projection for 2017 IPCA. We now look for 4.4% this year (mid-target: 4.5%) and 4.2% next year (unchanged estimate)." 

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