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Brazil Inflation Forecast Summary (2018)

Core Content

This document provides an analysis of Brazil's inflation outlook for 2018, focusing on the factors influencing price trends and inflation expectations. The key elements include the impact of regulated prices, services inflation, food prices, and the role of economic inertia.

Main Forecast

• Headline Inflation Forecast: Revised down to 3.5% for 2018 from 4.0%, reflecting a more moderate inflation environment.
• Inflation Expectations: Anchored inflation expectations have been maintained near target levels, supported by the central bank's regained credibility and a stronger currency.
• Minimum Wage Adjustment: The minimum wage is expected to rise by less than 3.0% in January 2018, due to lower inflation and GDP growth.

Key Drivers of Inflation

1. Services Inflation

• Services inflation is expected to decline in 2018, from 4.7% in 2017 to 3.8%.
• This decline is attributed to economic inertia and below-potential growth, which reduce demand pressures.
• Food outside the home and airfares may see slight increases due to higher food prices, but overall services inflation is expected to trend downward.

2. Regulated Prices

• Regulated prices inflation is projected to be 3.8% in 2018, down from 7.0% in 2017.
• This is due to good management of regulated prices and inertia mechanisms that help keep prices in check.
• Rental contracts and public service prices (e.g., road tolls, public transport) are expected to be adjusted based on this year's inflation, reinforcing the downward trend.

3. Food Prices

• Food inflation is projected to rise slightly to 4.4% in 2018 from -3.0% in 2017.
• The record grain harvest in 2017 helped keep food prices low, but 2018 is expected to see a small increase due to slightly lower grain production.
• Weather and supply changes for fruits and vegetables pose a natural risk to these projections.

4. Fuel and Electricity Prices

• Fuel prices are aligned with international levels, reducing the likelihood of significant increases.
• Electricity prices are expected to remain stable due to the current 'flag' system, which adjusts prices based on production costs.

Inflation Expectations and Policy

• Anchored inflation expectations are a key factor in the downward trend, as they help stabilize actual inflation.
• The central bank's credible policy and lower inflation targets for 2019 and 2020 (4.25% and 4.00%) are expected to reinforce the expectation of lower and possibly stable inflation.
• The document notes that while being in line with the consensus is favorable, it is also a potential risk for future inflation acceleration.

Economic Context

• The Brazilian economy has recovered from a prolonged recession, with two consecutive quarters of growth.
• However, it is still below potential, and growth acceleration in 2018 is expected to be moderate at 3.0%.
• This subdued growth is unlikely to drive inflation, as price trends remain controlled by inertia mechanisms and supply dynamics.

Legal and Regulatory Notice

• This document is non-independent research and a marketing communication under MiFID.
• It is not investment research and should not be relied upon for investment decisions.
• The information is based on public sources and internal models, and may not be accurate or complete.
• The document may contain simulated performance data and is not a prospectus or investment advice.
• It is intended for professional clients and relevant persons only, and may not be suitable for retail investors.
• BNP Paribas may have conflicts of interest and may engage in transactions inconsistent with the views expressed in the document.

Summary of Key Points

• Inflation for 2018 is forecast at 3.5%, driven by services and regulated prices.
• Food inflation is expected to rise slightly to 4.4% due to lower production.
• Economic inertia and below-potential growth are key factors in controlling inflation.
• Minimum wage and regulated prices are adjusted based on past inflation and GDP, contributing to lower price pressures.
• Inflation expectations are now anchored and may support lower inflation in the medium term.
• The document includes legal disclaimers and is not intended as financial or investment advice.