Brazil’s deflation to benefit Paraguay through foreign currency inflows

Inflation in Brazil decreased by 0.36% in August after a 0.68% drop in July. With this result, year-on-year inflation stood at 8.73%, according to the report of the Central Bank of Brazil.

According to analysts, it will impact Paraguay, mainly on foreign currency inflows to the country through family remittances.

The slowdown was mainly due to the cuts in electricity and fuel tariffs implemented recently to benefit middle and low-income people.

The recorded drops were 1.27% and 11.64% compared to the previous month, according to the Brazilian Institute of Geography and Statistics (IBGE).

However, the increase in food and beverage prices is 0.24%, the smallest rise recorded in July, because the decrease in milk prices mitigated it.

Food increases could still negatively impact the most vulnerable groups.

“Even so, the deceleration of inflation would imply improvements in the neighboring country’s growth prospects, which would favor Paraguay with higher sales and foreign currency income from remittances,” specified analysts from the consulting firm Mentu.

TIMELY POLICY

On the other hand, they emphasized that Brazil has now managed, thanks to a good and timely monetary policy, to bring down high inflation, an achievement that stands out in the region.

Carlos Fernández Valdovinos, economist and former president of the Central Bank of Paraguay, said that when the monetary policy response is forceful (the Central Bank raises interest rates in a timely and decisive manner), inflation control is possible and faster.

“The Central Bank of the Republic of Brazil shows the way. Of course, it has costs, but you have to do what you have to do,” he said.

Looking at the Paraguayan evolution, inflation also fell at a slower pace, monthly and year-on-year. However, it is still among the highest inflation in the region.

Inflation convergence is underway, on track to 4.1% by 2023 and 4% in the first quarter of 2024, the BCP confirmed after its August Consumer Price Index (CPI) report.

The month’s inflation report showed a variation of 0.4%, well below the 0.9% of August 2021 and 0.7% of July this year, despite solid increases, mainly in the prices of fruits and vegetables.

With this result, 12-month or year-on-year inflation is also reduced to 10.5%, down from 11.1% last July.

Meanwhile, the accumulated inflation for the year amounts to 7.2%, above the 3.6% verified in the same period of 2021.

With information from La Nación