Brazil posted its first monthly deflation in two years in the August preview of inflation, but the numbers failed to reassure analysts. Service prices, which had been surprising positively in recent readings, accelerated again, while the breadth of price increases also widened. Even so, economists caution it is too soon to say the trend of improving inflation has reversed.
According to the Brazilian Institute of Geography and Statistics (IBGE), the IPCA-15 consumer price index fell 0.14% in August, after a 0.33% rise in July. The result was above the median forecast of –0.22% compiled by Valor Data, which ranged from –0.28% to +0.09%.
It was the first monthly deflation since July 2023 (–0.07%) and the first time 12-month inflation dropped below 5% since March. On this basis, IPCA-15 slowed from 5.90% in July to 4.95% in August.
Five of nine expenditure groups accelerated, led by health and personal care (0.64% vs. 0.25%), personal expenses (1.09% vs. 0.25%), and education (0.78% vs. 0%). Meanwhile, food and beverages (–0.53%), housing (–1.13%), and transport (–0.47%) were the main downward drivers.
Electricity, heavily influenced by the Itaipu rebate, fell 4.93% despite the activation of the highest tariff flag. The item alone subtracted 0.20 percentage point from the index.
Underlying pressures, however, remain. The average of the five core measures monitored by the central bank edged up to 0.31% in August from 0.30% in July, according to MCM Consultores.
Despite showing deflation, August’s IPCA-15 showed an unfavorable composition. XP Investimentos estimated that core services inflation rose 0.55% on the month and climbed to an annualized 6.1% on a seasonally adjusted three-month moving average — up from 5.5%. By the same metric, core inflation eased slightly from 4.6% to 4.4%.
Tatiana Pinheiro, chief economist at Galapagos, highlighted that price diffusion rose from 49.6% in July to 57.2% in August, consistent with underlying inflation running near 5%. “These are weak numbers, but it’s not yet clear whether this is an outlier or a turning point,” she said, noting that items like health and home care (1.09%) and accommodation (2%) could reverse in coming months.
Mirella Hirakawa, head of research at Buysidebrazil, agreed, saying much of the upside surprise came from volatile components such as electricity and airfares. But she flagged that education costs (up 0.2%) and core services were stickier than expected. “In terms of quality, the report was worse than anticipated, but it doesn’t signal a reacceleration in 12-month inflation,” she said, adding that disinflationary dynamics remain in place.
Indeed, the data did not prevent downward revisions to inflation forecasts. Barclays cut its 2025 estimate from 5.1% to 4.9%, citing a stronger real and more favorable dynamics in industrial goods and food.
Still, “services inflation remains under pressure, reflecting a tight labor market. We expect headline inflation to fall 0.15% in the final August reading before rebounding by as much as 0.75% in September,” writes economist Roberto Secemski. “Overall, Brazil’s inflation outlook remains challenging and warrants Central Bank vigilance,” he wrote.
For monetary policy, the report likely weakened the case for an early start to Selic rate cuts. Rafael Gonçalves, chief economist at Daycoval, said a December start is “not impossible” but unlikely. “The Central Bank would not have time to adjust its communication with just one or two more data points,” he argued, pointing instead to January. “Only a sustained decline in 2027 expectations, as we saw this week in the Focus survey, could change our minds.”
Ms. Pinheiro of Galapagos maintains a more dovish view. “I see the IPCA-15 as an outlier. The broader story of slowing inflation and activity should continue, opening room for cuts before year-end,” she said.