Cheaper airfares push down mid-May inflation

Brazil’s mid-month inflation index slowed for the fourth consecutive month, rising 0.51 percent in the first half of May. The reading was below the market’s median forecast of 0.64 percent, according to a survey by Investing. On a 12-month basis, inflation eased from 4.16 percent in April to 4.07 percent this month, and also below predictions of 4.21 percent. 

Still, seven of the nine segments surveyed have seen prices rise so far in May, including products that are a heavy burden on Brazilian household budgets, such as health services and food, which became 0.94 and 1.49 percent more expensive, respectively.

Transportation costs were among the few to fall in the first half of May, thanks largely to a 17.2 percent drop in airfares. 

The bad news is that all surveyed regions registered price increases, showing that price bumps remain widespread in Brazil. 

With price hikes cooling, the Luiz Inácio Lula da Silva government may feel emboldened to continue its quarrel with the Central Bank, demanding a reduction in the authority’s high benchmark interest rate — parked at 13.75 percent per annum since last August.

Core inflation

Stripping out more volatile items, core inflation is an important measure for determining whether price increase trends are structural. According to Étore Sanchez, chief economist at brokerage firm Ativa Investimentos, mid-May core inflation showed a surprising improvement, rising 0.42 percent instead of the expected 0.48 percent.

“May’s reading was structurally positive. When we evaluate inflation accumulated over 12 months, the trajectory is still falling,” says Mr. Sanchez. 

Earlier this week, Brazil’s central banker Roberto Campos Neto said he had seen a significant deceleration in inflation, but that core prices and inflation expectations remain high.

However, the latest edition of the Central Bank’s Focus Report survey indicated a significant reduction in the market’s inflation projections for this year, with the median of estimates falling from 6.03 percent to 5.80 percent — a shift Mr. Campos Neto attributed to the recent change in fuel pricing policy by state-controlled oil major Petrobras.

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