Brazil: IPCA inflation slows to 0.16% m/m in January, 12M eases to 4.56% y/y

• IPCA inflation slows to 0.16% m/m in Jan from 0.52% in Dec, coming in slightly above the 0.15% consensus expectation
• Twelve-month inflation eases to 4.56% y/y in January from 4.83% in Dec, but remains above the fluctuation band limit
• Transport and food prices drive the IPCA increase, which was offset by falling electricity prices

IPCA inflation slowed to 0.16% m/m in January from 0.52% in December, coming in slightly above the 0.15% consensus expectation contained in the BCB's Focus Report, according to data released Tues. by the stats office IBGE. This marks the fifth consecutive increase, but was also the slowest for a January since 1994 (when the BRL was launched). In 12-month terms, IPCA inflation slowed to 4.56% y/y in January from 4.83% in December, marking the second consecutive slowdown. Higher transport and food prices drove the increase in January, but was offset by falling electricity prices.

Five of the nine monitored groups rose in monthly terms. Transport prices drove the increase, rising by 1.30% m/m in January, translating into a 0.27-pp upward impact on the monthly print. Food and beverage prices followed with a 0.96% m/m rise in January, though that slowed from 1.18% in December to translate into a 0.21-pp impact on the print. On the negative side, housing prices fell by a sharp 3.08% m/m, offsetting the increase in the other sectors and taking the monthly print down by 0.46pp. Lower electricity prices led the drop, enabled by the bonuses for consumer bills from the Itaipu hydroelectric plant. Clothing, household goods, and communication prices also fell m/m in January.

Overall, IPCA inflation remained elevated but did slow strongly from December due to lower electricity bills. Despite this easing, the 12-month print remained above the 4.50% upper limit of the +/- 1.50-pp fluctuation band. Officially, this is the first month that cumulative inflation remains above the limit under the new continuous inflation targetting regime introduced in January. In practice, if the 12-month cumulative print remains above this threshold for another five consecutive months, which is expected, inflation will exceed the target, prompting another letter from BCB Governor Gabriel Galípolo to Finance Minister Fernando Haddad. In his previous?letter, sent on Jan 10, Galípolo stated that inflation will likely remain above the 4.50% limit until Q3 2025, thus emphasizing the need for a tight monetary policy. For February, analysts polled by the BCB forecast inflation to jump by 1.37% m/m, reflecting the recent adjustment in diesel prices, the main fuel used in domestic transport and which is likely to lead to a domino effect on inflation.