On a monthly comparison, prices increased by only 0.06%.
Brazil's Selic rate, currently at 14.25%, has been cut three times by a quarter point each since May, after a long period of stability. The central bank's gradual approach reflects its desire to balance inflation control with economic growth, especially as the country approaches elections.
Emerging-market strategist Alvaro Vivanco of Wells Fargo Securities said: "Some of the food spike is fading, giving central banks some space to be dovish."
According to the central bank, the complete impact of tight monetary policy hasn't fully materialized yet, and economic activity has been stronger than anticipated. The central bank's target is 3%, with a tolerance range of 1.5 percentage points either side, meaning the current rate is just above the upper limit. Policymakers have previously indicated that they view the current easing cycle as appropriate given the moderation in inflation, but remain cautious about fiscal and energy risks.
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The central bank has already trimmed its benchmark Selic rate at three straight meetings, each time by a quarter point.
Brazil's economic deceleration, as the region's biggest economy, allows officials to continue with the planned interest rate cut. Looking ahead, uncertainty prevails because of volatile energy costs and President Luiz Inácio Lula da Silva's increased social spending before the October elections.
Market expectations for interest rates, as reflected in futures contracts maturing in January 2028 - often used to gauge sentiment on monetary policy - dropped by over 12 basis points after the annual inflation rate fell more than projected.
Although high borrowing costs have dampened consumer spending and slowed job growth, inflation still sits far above the central bank's 3% objective.
The central bank's easing cycle began in May after holding rates steady for several months. With the Selic currently at 14.25%, a quarter-point cut would bring it to 14%, the lowest since early 2022. Policymakers have stressed that future moves depend on incoming data, particularly energy prices and fiscal policy. The recent inflation print, while still above target, has provided some breathing room for further gradual reductions.
The latest data reinforces the central bank's cautious approach, but the path ahead is complicated by the upcoming October elections and President Lula's push for increased social spending, which could stoke demand-side pressures. Additionally, global energy price fluctuations remain a wildcard, as Brazil's electricity tariffs are sensitive to hydrological conditions and regulatory adjustments. These factors explain why policymakers have emphasized data dependency despite the favorable inflation report.
Capital Economics senior emerging markets economist Liam Peach wrote in a research note: "The bar for further interest rate cuts over the rest of the year has clearly risen and renewed energy-related inflation risks will likely add to policymakers' concerns."
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