Brazil Inflation: Short-Term Relief, Medium-Term Upside Risks

Research evidence excerpt

Brazil Inflation: Short-Term Relief, Medium-Term Upside Risks

IdeaM

Brazil Inflation: Short-Term Relief, Medium-Term Upside

Risks

Thiago Machado & Ana Madeira

We view the recent downside surprises in Brazil's inflation as temporary and should not be

interpreted as a long-lasting improvement in the inflation outlook. Over the next 2-3

months, headline inflation should continue to benefit from favorable supply-side factors –

including lower fresh produce prices, higher domestic beef supply and softer fuel prices –

keeping monthly IPCA prints relatively benign. This underpins our below-consensus

inflation forecast of 5.0% for 2026 (vs. 5.2% consensus, down from 5.3% previously).

However, as these temporary tailwinds fade, we foresee upside risks for our inflation

forecast of 4.0% in 2027. In particular, we highlight three key risks: the development of a

strong El Niño event, higher labor costs stemming from the proposed reduction in the legal

workweek (awaiting approval), and the transition toward a more inflationary phase of the

cattle cycle. We continue to expect BCB to deliver more easing than consensus in 2027

(11.00% vs 12.00%), despite upside risks for 2027 inflation. Historically, BCB tended to look

through temporary food and energy shocks unless they generate meaningful second-round

effects.

Short-term inflation relief...

Recent downside inflation surprises reflect a temporary relief rather than a lasting

improvement, in our view. Headline inflation posted a sizable downside surprise in June,

reinforcing the perception that disinflation gained momentum. However, we view most of

the recent improvement as reflecting temporary supply-side factors rather than a broad-

based easing in underlying inflationary pressures. In particular, the recent downside