May and June releases suggest that Brazil's inflation acceleration continued through Q2 despite the signs that adjustments to regulated goods and services prices are over. The bulk of the upside surprise appears to be driven by a higher-than-expected rise in food prices, although inflation also continued to accelerate in the housing and transportation segments (primarily as an effect of adjustments early this year).



Societe Generale estimates, "Inflation to have risen to 9.1% yoy through midJuly although the monthly price increment slowed to 0.45% mom. While housing inflation is set to tick above 18% yoy, food inflation likely entered the double digits after a gap of 21 months. Higher food price inflation came as a surprise given the decline in global agricultural prices, but probably reflects the serious effects of drought in several regions. Lastly, transportation inflation has averaged at nearly 7% this year compared with an average of 2.2% in this segment since the beginning of 2012."



According to the Societe Generale's in-sample forecasts from the structural inflation models, Q2 inflation is likely to be at 7.0-7.2%, i.e. much lower than the observed inflation of 8.5% yoy (based on the projection for June). The additional inflation may be attributed to the effect of price adjustments and the upside shock to food prices.

However, while escalating upside risks imply that the medium-term inflation outlook remains considerably uncertain, the model estimates appear to confirm a continued surge in trend inflation fundamentally.

"Both these factors mean upside risk to our forecast that the Selic rate will peak at 14.50% in Q3 15", says Societe Generale.