According to a Reuters poll of economists, Brazil’s inflation likely stayed high in July, though underlying pressures appeared to be easing.
Policymakers are intently monitoring the statistics as they consider when to implement long-awaited interest rate cuts to encourage economic activity ahead of next year’s presidential election.
The median estimate of 23 analysts polled between August 6 and 11 indicates a monthly inflation rate of 0.37% in July, up from 0.24% in June.
Higher energy bills drove the increase, more than offsetting a second month of food and beverage deflation.
Biweekly numbers have already shown that commodities like beef, rice, and other basic goods are becoming less expensive. Seasonal factors led to the reductions, reversing some of the sustained increases seen in previous months.
Annual rate still above central bank target
On a yearly basis, inflation is expected to tick down to 5.33% in July from 5.35% in June. The number remains far above the 3.0% target set by the central bank, allowing for a tolerance range of 1.5 percentage points, despite a slight decrease.
Economists say that while some of the core readings could improve, it would suggest that the central bank’s restrictive stance on monetary policy is finally slowing the rate of price increases.
Core measures have a significant input from services inflation, which is anticipated to slow slightly. Itau Unibanco analysts see the three-month moving average for services inflation slowing to 6.0% in July, down from 6.3% in June.
Early signs from the “Run Rate”
Market watchers are also looking at the inflation “run rate”, the annualised rate of inflation calculated using recent monthly data, as an early indicator of developments.
JP Morgan believes that this measure may have returned to the target range in the last three months for the first time in more than a year.
Such a scenario would support views that inflationary pressures are easing, even though headline readings remain over goal.
Outlook for monetary policy
A separate Reuters poll predicts that headline inflation will fall to an average of 4.6% in the first quarter of 2026.
This would allow the central bank to begin decreasing interest rates, which are currently at 15%, the highest level in two decades.
Last month, the central bank stopped its rate hike cycle to examine the impact of its tightening policies on the economy.
The move comes amid increased uncertainty over US tariffs, which might disrupt trade flows and prices.
Policymakers forecast consumer price rise to slow further by the end of 2025, coinciding with a projected slowdown in overall economic activity.
Currency strength could aid disinflation
This makes the domestic supply of tradable goods larger, in part due to the appreciation of Brazil’s real this year.
The stronger real makes imports cheaper in local currency terms and can help to mitigate price pressures for some goods with a high degree of imported content.
Economists say the strength of the currency could strengthen the disinflation trend in the next months, together with a deceleration of demand and the lagging effects of monetary tightening.
Although energy costs raised the headline number in July, softer food prices, a moderation in services inflation, and a more supportive exchange rate could give the central bank the confidence to launch a gradual rate-cutting cycle.
That makes the headline inflation report on Tuesday a key datapoint for the markets and policymakers.
A confirmation of these trends could cement a significant inflexion point for the Brazilian economy, one that equilibrates fighting inflation with providing the impetus to growth again.
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