Food Prices and Black Friday Drive Inflation Below Target, But Services Keep Interest Rates High, Experts Say

Recent inflation figures have brought a sense of relief, with falling food prices and the impact of Black Friday sales helping to pull the general inflation rate below the target limit. This development offers a glimmer of hope for consumers and the broader economy.

However, the situation is not entirely straightforward. While some sectors are showing significant disinflation, others, particularly those reliant on labor, continue to exhibit price pressures. This dichotomy is a key factor influencing the Central Bank’s cautious approach to interest rate policy.

The latest data, as reported by sources like G1, indicates a complex economic landscape. While the overall inflation trend is positive, underlying pressures in specific service sectors are preventing a complete easing of monetary policy. Experts are closely watching these trends to predict future economic moves.

Services Inflation Remains a Concern

Despite the overall positive inflation news, experts like Gustavo Sung, chief economist at Suno Research, highlight ongoing concerns with labor-intensive services. These services saw an acceleration in price increases, moving from 0.57% to 0.61% between October and November. In the longer term, these services have advanced to 6.69% and 6.73% on a 12-month and annualized quarterly average basis, respectively.

Sung attributes this acceleration to a resilient labor market, characterized by historically low unemployment rates and record-high wage bills. “This prevents a more comfortable reading of the inflationary scenario,” he explained.

Cautious Interest Rate Stance Expected

The prevailing view among analysts is that the Central Bank’s Monetary Policy Committee (Copom) will likely maintain the benchmark interest rate, the Selic, at its current level of 15% in its upcoming meeting. Claudia Moreno, from C6 Bank, stated that the latest data does not alter this expectation.

Moreno estimates that “the Copom should only begin its cycle of cuts in March, with the Selic reaching 13% by the end of 2026.” This gradual approach is seen as necessary to ensure the sustainability of inflation control.

Inflation Expectations and Credibility

Gustavo Sung further elaborated on the Central Bank’s cautious stance, emphasizing the need to preserve credibility and avoid disruptions to monetary policy. “The main source of discomfort among directors remains the persistence of inflation expectations unanchored from the target in the relevant horizon, despite recent improvements,” he stated.

Suno Research anticipates a subtle shift in the Copom’s communication in January, preparing the ground for a cautious easing cycle. They predict the first 0.50 percentage point cut in March, marking a gradual and technical process. This approach aims to align with maintaining the monetary authority’s credibility and achieving sustainable inflation convergence.

Mixed Signals in Service Indicators

The XP analysis echoes these sentiments, noting that service indicators, despite some recent improvements, remain at challenging levels. “We do not believe today’s data will substantially change the Copom’s strategy or market pricing,” they commented, maintaining their inflation projections for IPCA at 4.3% for 2025 and 4.2% for 2026.

Conversely, André Valério, senior economist at Inter, views the November results as confirming a benign inflation picture, with core inflation showing signs of accommodation. “In this context, the chances of the IPCA ending 2025 within the target increase, and we see favorable conditions for the Copom to start the cycle of cuts as early as the January meeting,” he predicted.

Mariana Rodrigues, economist at SulAmérica Investimentos, summarized the situation as a gradual disinflation process with some points of attention, such as the high level of labor-intensive services inflation. “For monetary policy, today’s IPCA does not alter the panorama. We continue to project cuts starting in March,” she concluded.