Signs of Falling Inflation and the Start of the Easing Cycle

BRAZIL ECONOMICS - Report 26 Sep 2016 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

With a negative output gap wider than in any period of falling inflation, and with the unemployment rate extremely high, important disinflationary forces are in place. However, the strong inertia, which has likely grown in recent years, and the steep increase of agricultural prices, with reflections on the food component in the IPCA, work in the opposite direction. These two movements have been impeding the decline of inflation. The result of the IPCA-15 for September shows that not only has the inflationary impulse from food prices started to dissipate, the pressures from components with stronger inertia has been weakening, as is the case of the prices of services affected by wages. These are movements that lay the groundwork of the Central Bank to start the easing cycle.

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