Wholesale Deflation: IGP-M falls 0.36%, easing pressure on industrial costs

The second preliminary reading of the IGP-M for August shows a 0.36% deflation, breaking the upward pressure cycle seen earlier this month. The decline, driven by the Producer Price Index (IPA) which fell 0.50%, reflects an adjustment in industrial and agricultural input costs. However, the market remains cautious: while wholesale prices ease, construction costs measured by the INCC continue to rise, up 0.73%. This wholesale decompression is a temporary relief, though it does not shift the structural trend of high costs. With the US Dollar at R$ 5.2043, exchange rate volatility limits further wholesale price drops, as many inputs are pegged to foreign currency. Following Ray Dalio's credit cycle framework, the economy remains in a forced deleveraging phase, where liquidity constraints prevent wholesale deflation from widening profit margins for highly indebted firms. Investors are advised to follow Benjamin Graham’s margin of safety principle, prioritizing companies with strong cash positions and diversifying into inflation-linked assets (NTN-B) to hedge against the resilience of construction-related inflation.