Brazil’s economy is bottoming out and may have hit its trough.  The biggest concern, besides the current lackluster GDP numbers out of the country today, is inflation.  So long as inflation remains parked above 8%, the Central Bank of Brazil will be forced to raise interest rates regardless of the economy.

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Even doing poorly, Brazil has managed to beat consensus. First quarter GDP came in better than expected. It declined 0.2%, but that’s better than market forecasts of 0.5%. Growth was helped by a meaningful inventories build up, without inventories however, first quarter GDP would have contracted 1% on a quarterly basis. In addition to that, there was positive net export growth of 5.7% and import growth of 1.2%.

“This GDP report might even be mildly positive, or at least not terribly negative,” says Bill Adams, senior international economist at PNC Financial in Pittsburgh. “The recession might not be at a bottom yet, but the first quarter’s contraction was a bit less severe than feared, and the trade balance is improving.”

The bad news comes from domestic demand, which contracted 1.4% quarterly. With unemployment rising and a general climate of disgust in Brazil regarding political leadership, Brazilians are not spending as much as they’re accustomed to. Household spending fell 1.5% from the fourth quarter, seasonally adjusted. The government is also spending less, which is no surprise. Government expenditures declined 1.3% in the first quarter compared to the fourth.

Bruno Rovai, a Brazil analyst for Barclays in New York, said weak domestic demand was in line with his expectation that the recession will be led by household consumption, reflecting lower disposable income, rather than a drop in fixed assets investments. “The outlook for growth in Brazil remains quite bleak. The (Central Bank) strategy for monetary policy will hurt growth conditions even further,” he said. The bank is hell bent on lowering inflation at all costs.

The Economist Intelligence Unit revised Brazil’s GDP growth forecast for 2015 to come in at -1.5%. The EIU was a little below consensus in their 1Q target of 0.6%. For Brazil hopefuls out there, maybe they’ll be wrong again on 2015 GDP

Brazil has been in this boat before: low growth, high interest rates, high inflation. The central bank stated that its goal was to get inflation to target of around 5.5% by next year. Then investors will see interest rates decline, helping propel Brazilian asset valuations higher.