Deflation in the IPCA-15 for August: What Changes for Interest Rates and Investments

The preliminary data on Brazil's official inflation surprised the market this week. The IPCA-15, released by IBGE, recorded a deflation of 0.40% in August, a sharper decline than the negative 0.30% projected by the median of analysts' estimates. Over the past 12 months, the indicator slowed from 4.52% to 4.24%, remaining within the upper limit of the target pursued by the Central Bank.

This data is relevant for two reasons. First, it confirms that inflationary pressure has lost traction more quickly than the consensus expected. Second, it gives the Copom more comfort to maintain the monetary easing cycle, which directly impacts those investing in fixed income, stocks, and even cryptocurrencies.

What Drove the Deflation of the IPCA-15 in August

Three groups of expenses explain most of the decline. The standout was Housing, with a drop of 1.41% for the month, resulting in a negative impact of 0.22 percentage points on the overall index. The main villain this time turned ally: residential electricity fell by 6.25% during the period, reflecting a more favorable tariff flag.

Next came Transport, with a decline of 1% and a negative impact of 0.20 percentage points. Airfares plummeted by 13.30%, and fuel prices decreased by 1.43%. For consumers, this means direct relief in their pockets, especially in a month that historically experiences lower seasonal pressure.

The Food and Beverages group also contributed with a negative variation of 0.57%, driven by a 0.97% drop in food at home. This type of data weighs heavily on families' perception of inflation, as food represents a significant portion of household budgets.

On the other hand, the groups that still exerted upward pressure were Personal Expenses, with an increase of 0.66%, and Health and Personal Care, which rose by 0.40%. These categories have their own dynamics, being less sensitive to monetary policy in the short term.

What the IPCA-15 Signals for the Central Bank's Interest Rate Policy

The 12-month accumulated rate of 4.24% places inflation within the tolerance band of the target, which is 3% with a margin of 1.5 percentage points up or down. In other words, the ceiling of 4.50% remains respected and with increasing leeway.

This is a figure that the Copom closely monitors when calibrating the Selic rate. As discussed in previous analyses on monetary policy, the committee has conditioned its next steps on the convergence of current inflation and expectations.

The deflationary surprise reinforces the view that there is room for further cuts in the basic rate. The futures interest market reacted in the same direction, with the curves closing at the shorter vertices. For fixed income investors, this has concrete implications: long-term fixed-rate and IPCA-linked securities tend to appreciate in this scenario.

However, it is worth noting that the Central Bank has adopted a cautious stance. Recent Copom minutes reinforced that the monetary authority looks at a broad set of variables, including exchange rates, fiscal policy, and the external scenario, before defining the pace of cuts. The deflation in the IPCA-15 is a positive sign, but it is not the only factor in the equation.

Historical Comparison: Deflation in August is Not Unprecedented, but the Magnitude is Striking

August is a month when the energy tariff flag usually contributes to occasional declines in the index. However, the magnitude of 0.40% stands out. In August 2023, for example, the IPCA-15 recorded a negative variation of 0.07%, and in 2022, the decline was 0.73%, amid temporary exemptions on fuels and energy that strongly distorted the reading.

The current number has a cleaner composition. There is no artificial fiscal measure pulling the data down. The drop in energy reflects regulated tariff adjustments, and the decline in airfares follows market dynamics. This makes the data more reliable as a thermometer of the real inflation trend.

For those monitoring the currency and interest rate markets, the reading is that disinflation in Brazil has more solid foundations than some past episodes. This does not mean that the scenario is free of risks. Fiscal pressure remains a point of concern, and the external scenario, with high interest rates in the United States, limits the maneuvering space of the Brazilian Central Bank.

What Changes for Investors

The deflation of the IPCA-15 has practical consequences for different asset classes. Longer-term Treasury IPCA+ bonds tend to benefit, as the drop in inflation expectations raises the market price of these securities. Those holding NTN-Bs in their portfolios likely saw appreciation in market valuation.

For the stock market, the scenario is also constructive. As analyzed in articles about the Ibovespa and Selic, lower interest rates reduce companies' capital costs and make equities relatively more attractive compared to fixed income. Sectors such as consumption, retail, and construction, which are sensitive to credit, tend to react more intensely.

In the crypto market, the effect is indirect but relevant. Lower interest rates in Brazil increase the appetite for risk assets in general. As explained in our cryptocurrency coverage, the correlation between domestic monetary policy and the flow to digital assets has grown as more Brazilians access this market.

The IPCA-15 data is a preview. The full IPCA for August, which will be released by IBGE in September, will provide confirmation. But the signal is already given: Brazilian inflation is decelerating faster than the consensus expected, and this reshapes the map of opportunities for the second half.

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