Brazil: Inflation slows more than anticipated in May, but remains notably above target
Latest reading: Inflation waned for the first time in four months in May, coming in at 5.3%, down from April’s 5.5%. May’s reading surprised markets to the downside; still, it remained above the Central Bank (BCB)’s 1.5–4.5% tolerance band for the eighth month running. Looking at the details of the release, the softer rise was largely due to a slower increase in prices for transportation. In addition, price pressures for food and beverages, as well as for clothing, grew at more moderate paces.
That said, the trend pointed up slightly, with annual average inflation coming in at 4.8% in May (April: 4.7%). Moreover, core inflation was stable, coming in at April’s 5.1% in May.
Finally, consumer prices rose 0.26% from the previous month in May, which was below the 0.43% increase recorded in April and the weakest reading since January.
Outlook: Our Consensus is for inflation to accelerate ahead until Q4, from which point it should trend down. By Q3 2026, inflation is projected to be within the BCB’s tolerance band as the full impact of the central bank’s tightening cycle trickles down to the economy.
Overall in 2025, inflation is seen hitting a three-year high and overshooting both last year’s level and the Central Bank’s tolerance range. A robust labor market will push up wage growth; moreover, the Brazilian real will average weaker vs the U.S. dollar than last year, driving imported inflation. Extreme weather stoking electricity and food prices is an upside risk, while the impact of the government’s fiscal policy on domestic demand is a factor to monitor.
Meanwhile, May’s lower-than-expected headline inflation data may cause the Central Bank to slow the pace of its tightening cycle further when it reconvenes next on 17–18 June. That said, May’s core inflation and Q1’s robust GDP data may suggest otherwise. Conversely, threats from U.S. trade policy pose a downside risk and could lead the BCB to pause its tightening cycle.