On Wednesday (26), the Brazilian Institute of Geography and Statistics (IBGE) reported that the mid-month inflation index, IPCA-15, increased by 0.39% in June compared to May.

This rise was slightly below expectations, as projections compiled by Valor Data, Valor’s financial data provider, had anticipated a median increase of 0.43% for the month.

Over the 12-month period, the IPCA-15 reached 4.06% in June, falling short of the 4.1% median estimate provided by consultants and financial institutions.

The IPCA-15 serves as a preliminary indicator of the Extended Consumer Price Index (IPCA), Brazil’s benchmark inflation index, calculated based on a consumption basket for families earning between one and 40 times the minimum wage and spans nine metropolitan regions, as well as Brasília and Goiânia. The primary differences between the IPCA-15 and the IPCA lie in the collection period and the geographic coverage.

The collection period for the June IPCA-15, which ran from May 16 to June 14, was notably influenced by the floods in Rio Grande do Sul, impacting the data gathered.

Significant price changes in food, airline tickets, and gasoline were the primary contributors to the index’s movement in June. Notably, food and beverage prices surged by 0.98%, marking the highest increase among the nine categories of expenditure tracked.

Household food inflation saw a significant increase from 0.22% in May to 1.13% in June. Notable price hikes included English potatoes (24.18%), long-life milk (8.84%), rice (4.20%), and tomatoes (6.32%). Additionally, the cost of food away from home rose from 0.37% to 0.59% during the same period.

In the housing category, which experienced an overall increase of 0.63%, notable rises were observed in residential electricity rates (0.79%) and water and sewage services (2.29%).

Other categories showing increases included household goods, which saw a slight improvement from a decrease of 0.44% to just a 0.01% reduction, and personal expenses, which rose from 0.18% to 0.25%.

“Food prices are expected to continue exerting pressure on inflation,” said Matheus Ferreira, an economist at Tendências Consultoria.

Despite Porto Alegre registering a 0.41% increase in the IPCA-15 for June, Mr. Ferreira points out that the breakdown of the local data still indicates significant pressure from food prices.

“In Porto Alegre, prices for household food items jumped by 1.97%, compared to the national average of 1.13%,” he explains. “The inflationary pressures from the recent climatic events are clearly reflected in food costs. We anticipate that food prices will continue to face upward pressure through the end of the month, though we expect a reversal in the following months.”

Among the nine expenditure categories tracked by the IPCA-15, five saw price declines: clothing decreased from 0.66% to 0.30%, transportation dropped from 0.77% to -0.23%, health and personal care fell from 1.07% to 0.57%, education eased from 0.11% to 0.05%, and communication marginally reduced from 0.18% to 0.17%.

Fabio Romão, an economist at LCA Consultores, notes that reductions in sectors such as housing, clothing, transportation, and health are likely to moderate the June IPCA to 0.34%.

In the metropolitan region of Porto Alegre, the IPCA-15 increased by 0.41% in June, following a 0.86% rise in May. However, the IBGE’s reading came in below some economists’ expectations.

“We had projected an IPCA-15 of 0.9%, but it registered at 0.4%,” said André Braz from the Brazilian Institute of Economics at the Getulio Vargas Foundation (FGV Ibre). Porto Alegre represents 8% of the national IPCA.

Mr. Braz explains that the data collected by FGV Ibre in Porto Alegre indicates that the impact of food prices on inflation is likely to be more pronounced than what was observed in the IPCA-15, suggesting that June’s inflation rate could exceed last year’s figures.

“Collecting price data is challenging right now because many establishments are either closed or undergoing cleaning. When we cannot conduct field surveys, we resort to analyzing data from invoices. This approach also provides us an opportunity to forecast a bit further into the future,” adds Mr. Braz.

FGV Ibre forecasts a 0.4% increase in the IPCA for June, with an annual projection of a 4.15% rise.

“This month, we’ve seen an increase in the dispersion measure alongside an acceleration in the core inflation averages, which are concerning developments,” notes Mr. Romão.

The dispersion measure reached 56.95%, an uptick from May’s 55.31% and significantly higher than June 2023’s 50.68%. “This increased dispersion is partly due to fluctuations in food prices, but also to a rise in industrial goods. This can be attributed to the exchange rate dynamics or logistical challenges in the South, which is a critical hub for auto parts,” he explains.

The core average inflation rate increased to 0.33%, up from 0.31% in May and closely aligning with June of the previous year at 0.34%. “This reflects the issue of resilient prices, particularly with underlying service costs accelerating month-over-month, which ties back to the strength of the labor market,” he said.

Despite the lower-than-expected inflation forecast for June, the overall outlook remains unchanged in terms of monetary policy. “This does not alter the scenario that the cycle of monetary policy easing has concluded for this year,” states William Jackson, chief economist for emerging markets at Capital Economics.

Andréa Angelo, an inflation strategist at Warren Investimentos, alerted clients in a recent note about signs of a resurgence in underlying services inflation, particularly within the labor-intensive group.

“These items are highly sensitive to fluctuations in income and employment and tend to display more inertia. Consequently, we anticipate that the underlying services group will close the year near 6%, an increase from 4.8% in 2023,” Ms. Angelo wrote.

Warren Investimentos has adjusted its IPCA projections for June downward from 0.33% to 0.28%, and for July from 0.25% to 0.24%. Looking ahead, the firm forecasts a slight upward bias in inflation, projecting the IPCA to rise by 4% in 2024.