Inflation slows in June, but the 12-month rate remains well above the target

Consumer prices rose 0.21 percent in June in Brazil, driven mainly by the higher cost of food, but at a much slower pace than in May, when inflation increased 0.46 percent, as measured by the Brazilian Institute of Geography and Statistics (IBGE). 

Brazilian inflation stood at 2.48 percent in the first half of the year. However, the rate over the last 12 months rose from 3.93 percent in May to 4.23 percent in June, consolidating a halt in the disinflationary process initiated in the previous year.

Despite rising less than in the previous month, prices in the food and beverage group increased 0.44 percent in June. This group alone accounted for half of the overall inflation for the month. 

Among the nine product groups monitored, seven had price increases in June. In addition to food, health and personal care costs saw a significant increase of 0.54 percent in the month, representing 0.07 percent of the June result.

At the beginning of the year, several economists warned that low-income families would feel the impact of rising consumer prices again in 2024, mainly because of El Niño’s impacts on food production. 

The data for May and June confirmed these expectations. Last month, production problems in items such as milk and potatoes, influenced by adverse weather, helped push food costs up, according to IPCA research coordinator André Almeida.

Food consumed away from home increased by 0.37 percent, below the 0.50 percent recorded in May, but this also helped to put pressure on prices.

As for healthcare costs, the rise was mainly due to increased health plan prices. The so-called individual or family plans, which are paid entirely by the beneficiaries and represent almost 16 percent of the market, had their annual increase limit (6.91 percent) announced by the regulatory agency ANS at the beginning of June. 

As the new price comes into effect on the anniversary of the contracts, more inflationary pressure is expected from health plans in the year’s second half.

Another item with significant weight in the IPCA that should put pressure on July’s result is gasoline. Yesterday, state-controlled oil and gas giant Petrobras announced a price increase for gasoline distributors (7.91 percent) and 13 kg cooking gas cylinders (9.8 percent), which should translate into higher consumer prices in the coming weeks. For every 1 percent increase in gasoline, the impact on the IPCA is 0.05 percentage points.

The good news is that inflation in the services sector — which is always on the radar of the Central Bank’s Monetary Policy Committee — slowed down in the 12-month window to 4.49 percent, driven down by the home food subgroup, which was up by 0.47 percent in June versus 0.66 percent in May. This is the lowest result for services inflation since September 2021, when it registered 4.41 percent.

Core inflation — which excludes more volatile prices, such as food, energy, and fuels — also slowed down in June, printing at 3.11 percent in 12 months, from 3.17 percent in May. Core inflation is an important measurement to gauge whether inflationary trends are structural.

“Going forward, we expect some reacceleration of services reflecting the tight labor market situation, as well as an acceleration of industrial [activities] amid a more depreciated exchange rate,” Itaú economists wrote, indicating that the momentary deceleration in service prices is not enough to halt the ongoing deterioration in inflation expectations.

On Monday, in the Focus Report — a weekly survey the Central Bank carries out with top-rated investment firms — the median projection pointed to an IPCA of 4.02 percent at the end of 2024, the ninth consecutive increase in inflation expectations.

Projections for the end of 2025 also increased to 3.88 percent, while the median forecast for 2026 remained unchanged for several weeks at 3.6 percent.

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