Is the worst of Brazil's inflation crisis over?

As inflation decelerated in Brazil, debate ensued on whether the worst has passed and if the central bank could reduce the Selicbenchmark rate.

The official inflation index contracted 0.69% in July, compared to an increase of 0.67% in June, according to latest figures by statistics bureau IBGE. Twelve-month inflation in July was 10.07% and 11.89% in June.

The drop came on the back of a 4.51% fall in transport prices, as fuel prices dropped 14.2%.

“Inflation is better now. Perhaps this drastic drop in prices that we saw in July will not be repeated, but for the coming months, when we evaluate the annual inflation rates, there is a downward trend, so we can say the inflation peak is behind us,” Banco Alfa chief economist Luis Otavio Leal told BNamericas.

Fuel prices began falling after the national government and states cut taxes and pressure built on federal oil firm Petrobras to lower prices.

President Jair Bolsonaro’s re-election campaign has identified inflation as key to defeat former president Luiz Inácio Lula da Silva, who is the frontrunner ahead of the October elections in all polls. 

Yet, the annual inflation figures remain far higher than the central bank target of 3.50%, although the monetary authority has still room to lower the base rate.

Last week, the Selic rate rose to 13.75% from 13.25%. Early in the pandemic, the rate reached a record-low 2%, but from March 2021, the central bank implemented aggressive hikes as inflation rose. 

"The central bank likely keeps the Selic rate unchanged at least until August 2023. First, because inflation remains well above the target and second because the monetary authority seeks to wait and see what the [newly] elected government's fiscal strategy will be in 2023 and make an assessment of the impacts on government spending and inflation," said Leal.