Supply Shocks Gain Weight in Brazil's Inflation Picture

Supply constraints have become a significant contributor to inflation in Brazil, according to a study by UBS Global Wealth Management. The study found that while demand still plays a larger role in core inflation measures, supply shocks are increasingly driving price increases. In the past three years, demand was the main source of inflationary pressure.

The analysis points to the war in the Middle East as one factor disrupting global oil supplies and contributing to supply constraints. Brazil's benchmark consumer price index, the IPCA, rose 4.64% in the 12 months through June, with 2.22 percentage points attributed to supply factors, 1.37 percentage points to demand, and 1.06 percentage points classified as ambiguous.

However, when looking at core inflation measures, which strip out volatile items, demand accounted for 1.87 percentage points of the increase, compared to 1.60 percentage points from supply factors. Solange Srour, Brazil head of macroeconomics at UBS Global Wealth Management, noted that 'demand has cooled somewhat and supply accounts for a larger share.'

Fábio Romão, senior economist at economic consultancy 4intelligence, highlighted concerns about the impact on industrial goods prices. He said that industrial goods had been more contained in recent inflation readings but rose again in August, increasing 0.43%.