Inflation picks up in July, driven by transportation costs

Brazil’s official IPCA inflation index rose 0.12 percent in July, driven mainly by fuel prices and their impact on transportation costs. The result brought the 12-month rate to 3.99 percent, up from 3.16 percent in June and above market projections of 3.93 percent, but still within the Central Bank’s target range of up to 4.75 percent. 

The increase was already expected, and it is likely to repeat in the next two months due to unfavorable year-on-year comparison effects — in 2022, July (-0.68 percent), August (0.36 percent), and September (0.29 percent) saw sharp drops in prices caused by tax exemptions on essential items such as fuel during last year’s electoral campaign. 

Five of the nine products and services monitored by the IBGE showed price increases in July. The transport group had the largest impact on the final index (0.31 p.p), delivering the most significant upward variation (1.50 percent). In contrast, the housing group (-1.01 percent and -0.16 p.p.) and food and beverages (-0.46 percent and -0.10 p.p.) pushed the IPCA downwards.

Gasoline, the sub-item with the highest individual weight in the index (4.79 percent), was the product that most affected the July result with a change of 4.75 percent, contributing 0.23 p.p. to the monthly rate. “Last month, reductions were applied at refineries. The increase in July captures the resumption of [federal taxes PIS/COFINS] taxes on fuels,” explained André Almeida, research manager at Brazil’s official statistics agency IBGE. Higher prices for airline tickets (4.97 percent) and new cars (1.65 percent) also contributed to the transport group’s rising costs.

However, IPCA’s uptick in the second half of the year is not expected to change the disinflationary process, only to slow it down, which means no change of scenario for the Monetary Policy Committee’s new cycle of cuts of the benchmark interest rate.

In addition to cutting the Selic benchmark interest rate by 0.5 p.p. last week, the Copom anticipated that its members unanimously agreed that cuts of the same magnitude would take place in the following meetings while maintaining a contractionary monetary policy necessary for the ongoing disinflationary process.By the year’s end, the country’s leading financial institutions polled by the Central Bank expect inflation to hit 4.84 percent, falling narrowly outside the inflation target band.

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