Brazil’s consumer price data for May, anticipated to show an acceleration in inflation, is reflective of the severe disruption caused by recent floods in the south of the country. According to a Reuters poll conducted from June 5-10, annual inflation is forecasted to rise to 3.89%, significantly deviating from the central target of 3% ± 1.5 percentage points. This deviation is primarily attributed to temporary disruptions in production and logistics due to the excessive rains in Rio Grande do Sul state.
Monthly and Annual Inflation Forecasts
Price data, scheduled for release on Tuesday, is expected to indicate a monthly inflation increase of 0.42% in May, up from 0.38% in April. On an annual basis, inflation is projected to increase to 3.89% from 3.69%. These estimates, derived from a median of 23 economists polled by Reuters, underscore the transient nature of the inflationary pressures resulting from the floods.
Impact of Flooding on Food Prices
UBS analysts, in their recent report, highlighted that the effects of the flooding would likely start to manifest in this data release. Despite a deceleration in food-at-home inflation on a monthly basis, there is an expectation of year-over-year acceleration to 2.9% from 2.6%. UBS further anticipates food inflation to peak at 4% in June, before decelerating to 3.4% in August and 3.1% by the end of the year. This forecast suggests that the inflationary spike due to the floods is temporary and could reverse in subsequent months.
Government Measures and Economic Outlook
In response to the economic fallout from the historic floods, which resulted in over 170 fatalities, Brazil conducted a rare auction, purchasing 263,370 metric tons of imported rice to stave off a potential price surge. Preliminary data indicate that food inflation induced by the floods was less severe than initially feared. However, concerns about long-term inflation trends persist among economists and the leadership at the central bank.
Broader Economic Context
The broader economic context shows inflation expectations inching towards 4% for the year. This is driven by a relatively strong job market, ongoing fiscal concerns, and differing views among policymakers at Banco Central do Brasil (BCB). Economists from Societe Generale noted that the Brazilian economy is still growing near its potential, with a tightening labor market and a Brazilian real under pressure from various domestic and global factors. They anticipate a slow moderation in inflation after July but do not expect it to meet the BCB’s target within the current policy horizon.
Economic Growth and Policy Stance
Brazil’s economy experienced a 2.5% year-on-year growth in the first quarter, rebounding from a sluggish second half of 2023. Despite this growth, last month, Brazil’s finance minister refuted suggestions that the government might alter the inflation target. He acknowledged the difficulty of the 3% goal but emphasized the importance of evaluating compliance over a longer period than just a calendar year.
As Brazil navigates the economic challenges posed by the recent floods, the anticipated inflation data for May will provide critical insights into the extent of the impact on consumer prices. While temporary disruptions are expected to cause a spike in inflation, the overall outlook suggests a potential moderation in the latter half of the year. Policymakers and economists will be closely monitoring these trends to adjust their strategies and ensure economic stability.
