Brazil inflation seen staying below target ceiling, reinforcing case for March rate cut

Inflation in Brazil likely kept a moderate pace in January, remaining below the upper bound of the central bank's target range for a third month in a row, according to a Reuters poll with economists.

The anticipated result is bolstering expectations that Banco Central do Brasil might start slashing rates in March.

A survey of 20 economists conducted between February 4 and February 9 revealed that the median estimate for annual inflation increased from 4.26% in December to 4.44% in January.

Despite the increase, the projection would still be below the central bank's target range ceiling of 4.50%, which is centred at 3% and contains a tolerance band of 1.5 percentage points either way.

Estimates in the poll ranged from 4.38% to 4.60%, and only one forecast exceeded the official ceiling of 4.5%.

The January print is due on Tuesday from Brazil's statistics agency, IBGE.

Price increases due to personal care and health costs

Consumer prices are predicted to have increased by 0.32% in January, which is a little less than the 0.33% increase in December.

Health services and personal care products, which exhibited notable growth in a bi-weekly inflation reading, provided support for the advance.

The personal hygiene section, which includes skin care goods that usually see higher demand during the Southern Hemisphere's summer months, increased by 1.38%, according to data for the period through mid-January.

In addition to these secondary categories, analysts pointed out that changes in administered prices probably contributed.

According to market comments included in the study, a decline in power prices was anticipated to be counterbalanced by higher gasoline taxes and rises in public transportation fares.

Fuel taxes and transport costs offset energy relief

An increase in a freight tax, which accounts for a large share of the final gasoline price, offset recent fuel price reductions by state-owned oil company Petrobras.

As a result, transport costs continued to exert upward pressure on headline inflation.

At the same time, other components of the consumer basket helped contain price growth.

Lower prices for industrial and semi-processed goods also helped keep food inflation in check.

A large harvest last year further eased upward pressure on food prices.

The economic slowdown has also limited manufacturers’ ability in the industrial sector to raise prices, helping keep goods price inflation contained.

Labour market dynamics continue to restrain services inflation

Analysts expect disinflation in the services sector to proceed more slowly, even as pressures related to goods have eased.

They believe the pace of price moderation in this segment is being restrained by a still-tight labour market and persistent wage pressures.

Analysts also noted that a more stable exchange rate, reduced inflation inertia, and a slowdown in economic activity should gradually help ease services inflation over the course of the year.

Inflation has already declined significantly as a result of last year’s currency appreciation.

High interest rates in Latin America’s largest economy helped support the stronger currency by attracting capital inflows and easing pressure on import prices.