Brazil Inflation Data Paints Rosier Picture After Fuel Tax Cuts

Brazilian consumer prices increased slightly less than expected in the month to mid-July, the country's statistics agency said on Tuesday, posting the lowest monthly increase in two years following a wave of government anti-inflation measures.

Brazil's IPCA-15 consumer price index rose 0.13% in the period, down from 0.69% in the previous month, while the median forecast in a Reuters poll for mid-July stood at 0.17%.

Economists see the data paving the way for a downward inflation trend in Latin America's largest economy.

"This looks like a good start to the third quarter," said Andres Abadia, chief Latin America economist at Pantheon Macroeconomics. "The downtrend likely will continue over the following months."

The monthly slowdown came on the back of federal legislation cutting state taxes levied on fuel, resulting in a sharp fall in gasoline and ethanol prices.

President Jair Bolsonaro has been pushing for measures to reduce fuel prices in a bid to get re-elected in October, with high inflation hurting his popularity as he trails former President Luiz Inacio Lula da Silva in opinion polls.

Transportation costs as a whole dropped 1.08% in the month, official data showed, partly offseting a 1.16% increase in food and beverages prices.

In the 12 months to mid-July, inflation hit 11.39%, roughly in line with expectations and slowing for the second consecutive month - though still far above the central bank's target of 3.5%, plus or minus 1.5 percentage point.

William Jackson, chief emerging markets economist at Capital Economics, said the mid-July figures provided the first clear sign that inflation had peaked, but warned that monetary policies at Copom, Brazil's central bank, would remain tight.

"With the headline rate far above target and fiscal risks growing, Copom's tightening cycle has a little further to run and interest rates will remain high well into next year," Jackson said.

Brazil's central bank has been hiking interest rates aggressively since last year to rein in soaring consumer prices, with the benchmark rate currently at 13.25%.