Brazil's mid-month inflation gauge IPCA-15 declined 0.40% in August from July, outpacing market forecasts for a 0.30% to 0.32% drop and marking the steepest monthly decline since 2023. The 12-month rate eased to 4.24% from 4.52%, remaining below the central bank's upper tolerance threshold of 4.50%. Year-to-date inflation stood at 3.09%.
The broader disinflation trend was supported by a 1.41% drop in housing costs, driven by a 6.25% reduction in residential electricity prices following the Itaúta bonus adjustment. Transport prices fell 1.00%, led by a 13.30% decline in airline tickets and a 1.43% decrease in fuel costs. Food and beverage prices declined 0.57%, with household food items down 0.97%.
Core inflation measures provided a more nuanced picture. The five-core inflation measure rose 0.23% on the month, while its three-month annualized rate fell to near 3.8%. The diffusion index increased from 48% to 52%, indicating a broadening disinflationary trend across components.
Services inflation, however, remained a persistent concern. Underlying services prices accelerated to 0.50% in August from 0.30% in July, exceeding expectations of 0.43%. Over 12 months, services inflation edged down to 5.03% from 5.08%, though labor-intensive services rose 0.55% on the month and 7.2% year-over-year. Excluding volatile airline ticket prices, general services inflation would have been approximately 0.41%, still above the 0.24% consensus forecast.
The central bank's monetary policy committee (Copom) faces a delicate balancing act ahead of its next meeting on September 16. At its August gathering, the bank reduced the benchmark Selic rate by 25 basis points to 14.00%, the fourth consecutive cut of that magnitude. The Focus survey median now projects the Selic ending 2026 at 13.75%, while Inter forecasts a further 75 basis points of cuts by December, bringing the rate to 13.25%. Daycoval maintains a 5.0% inflation projection for the full year.
Economists caution that while the disinflation trend is encouraging, services inflation remains elevated and could constrain the pace of policy easing. Leonardo Costa of ASA noted that the surprise was concentrated in volatile items, while core inflation remains benign in the near term. Daycoval's Julio Barros emphasized that core inflation pressures persist and remain a challenge for policy makers. Inter's André Valério highlighted that services inflation still warrants caution, and Genial's Gabriel Pestana indicated there is insufficient evidence to abandon a cautious stance.
