Monthly IPCA soft, but above target in 12 months: economists reinforce caution

The release of the IPCA for July, made this Tuesday by IBGE, followed the script of previous ones: the variation of the official inflation index came below the market estimate, driven by food and the appreciation of the real against the dollar. However, although it is decelerating, the index accumulated in 12 months remains well above the target sought by the Central Bank, with prices of services and cores still heavy. Thus, the recommendation of a cautious Copom and maintenance of the interest rate remains among economists. The full index for the month showed 0.26% in July, well below the market consensus and also of some investment houses, which expected an IPCA of up to 0.36% compared to June. In the accumulated 12 months, the inflation rate fell from 5.35% to 5.23% in one month – still far from the annual target of 3% pursued by the monetary authority. The most significant relief came from the Food and Beverages group (-0.27% in the month) and Clothing (-0.54%), while the upward pressures, which fell 0.54%. On the other hand, upward pressures were concentrated in Housing (+0.91%), with prices in the group driven by electricity price adjustments in several capitals; and Personal Expenses and Transportation (0.76% and 0.35%), in these cases driven by the adjustment of lotteries and the increase in airfares during the high season. According to André Valério, senior economist at Inter, the July result was a positive surprise and, although today’s data has little short-term influence, it will give the Copom more confidence for the upcoming meetings. ‘In August, we should observe a deflation of the index, influenced by the Itaipu bonus, which will contribute to maintaining the current deceleration trend of inflation. However, the beginning of the rate cut cycle still depends on a clearer indication that the restrictive monetary policy is impacting the real activity,’ he commented in a note. He also said that there are clear signs of activity and credit accommodation, which should lead to lower GDP growth in the 2nd quarter. ‘We maintain the view that the Copom will start the rate cut cycle at the December meeting, with an initial 50 basis point cut.’ Industrial vs. services When evaluating the average core inflation, Leonardo Costa, economist at ASA, considered the balance mixed, with a worse qualitative in services. ‘The inflation of industrialized goods has also been surprisingly low, probably due to the appreciation of the exchange rate in 2025. On the other hand, services remain at high levels, with a more modest deceleration in the comparison of the 3-month moving average (6.1% in July),’ he compared. Igor Cadilhac, economist at PicPay, reinforced this view by highlighting that, with the exception of services, all other measures came in better than projections. ‘However, as underlying services represent one of the main qualitative metrics, the result should be interpreted with caution. We maintain the assessment that a restrictive monetary policy is still necessary, with the Selic rate remaining at 15% until the end of the year,’ he recommended. PicPay maintains the inflation projection of 5.1% in 2025 and continues to observe a balanced risk balance, with net disinflationary effects from the tariff war. ‘The exchange rate remains relatively under control, and expectations have been persistently improving. In addition, current data indicate a more positive dynamics. Nevertheless, the scenario remains significantly under pressure,’ warned Cadilhac. Gustavo Rostelato, economist at Armor Capital, on the other hand, commented that the composition of the IPCA has maintained the dichotomy observed recently: while industrial goods and home food contributed to deflation, services and underlying items remained at high levels. ‘Nevertheless, the average of cores was 0.26%, below projections. In general, the result brings some relief to the Copom, but still shows pressures in inertial categories,’ he said. Caution Gustavo Sung, chief economist at Suno Research, agrees that the convergence of inflation to the target still requires caution and firmness from the Central Bank. ‘The minutes of the last Copom recorded bearish surprises against market projections, but service inflation remains high and cores are above the level compatible with the target, signaling demand pressure and the need to keep the contractionary monetary policy for an extended period,’ he stated. In the view of Claudia Moreno, economist at C6 Bank, the IPCA data for June and July showed some cooling off of inflation, but she warned that this movement should be temporary. ‘Although the fall in commodity prices and the weakening of the dollar may be easing the pressure on food and industrial goods, domestic factors, such as the very active labor market and a likely more depreciated exchange rate, according to our projection, should continue to weigh on Brazilian inflation,’ she commented. The bank’s estimate is that the IPCA will reach 5% by the end of 2025 and end 2026 at 5.7%. ‘The IPCA numbers do not change our expectation that the Monetary Policy Committee should keep interest rates stable in the coming months. Our projection is that the Selic will remain at a high level for a long time, staying at 15% until the end of 2026.