Brazil inflation falls 0.32% in August

Housing was the main driver of the pullback, with the group falling 1.87% and shaving 0.29 percentage point off the headline index. Residential electricity alone dropped 7.63% and cut 0.33 point from inflation, helped by the Itaipu bonus, a temporary credit on power bills that will unwind in coming months.

That matters for policymakers because the benefit is transitory. Once the bill discount drops out, inflation can re-accelerate, complicating the Banco Central do Brasil’s path on interest rates even as the latest data improve the near-term price backdrop.

Transport prices also eased, falling 0.86% as airfares slid 13.17% and fuel prices dropped 0.91%. Food and beverages declined for a second straight month, down 0.34%, with sharp falls in staples such as potatoes, carrots, onions and tomatoes helping household budgets.

The surprise deflation may support Brazilian assets at the margin, including the EWZ ETF, which has been trading near its 50-day and 200-day moving averages with a strong RSI reading, while expectations for future inflation remain a key risk for local bonds and the real. But with the electricity effect temporary and core pressures still uneven, investors will be watching the next IPCA prints and the central bank’s guidance for signs of whether disinflation can last.