Brazilian inflation is expected to continue easing this year; however, at a slower rate as there is a renewed risk of stronger food inflation. IPCA inflation in the country came down to 8.74 percent in July from 10.71 percent year-on-year in January as housing inflation eased sharply to 5.46 percent year-on-year from 16.48 percent due to strong base effect and as transport inflation moderated significantly.

The overall slowdown took place despite the fact that food and health & personal care inflation have continued to stay high in 2016 at around 13 percent year-on-year and 11 percent year-on-year respectively. Inflation data released in the past couple of months indicate a slight slowdown in t he health & personal care category; however, food inflation continues to be stubbornly high.

Inflation in regulated categories continued to fall in July, but non-regulated categories recorded an increase in t he month. Therefore, even if inflation seems to slow in the coming quarters because of the base effect, weakness in demand and the lagged-effect of monetary tightening, it would continue to be significantly above the Central Bank of Brazil’s target range, said Societe Generale in a research report.

“The mid-month IPCA-15 series is likely to moderate to 8.79 percent yoy in August from 8.98 percent in July, and the trajectory of food inflation will be the key component to watch”, added Societe Generale.

Overall, inflation is likely to continue easing in 2016 and 2017; however at a moderate pace. The inflation trajectory for next year is a bit more uncertain. This is due to the absence of any obvious base effect and the fact that a host of external and domestic factors that shape inflation expectations have dropped significantly.

But the recent appreciation of the Brazilian real, if sustained, might add certain risk on the downside to the medium-term inflation outlook. Furthermore, the considerably deteriorating output gap and worsening labor market have made sure that the second degree effect of high 2015 inflation continues to be curbed, stated Societe Generale.