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 clothing grew at more moderate paces.
That said, 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 remain above target in the coming quarters, as the full impact of the central bank’s tightening cycle will take time to trickle down to the economy. Moreover, a robust labor market will push up wage growth. 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.