Aug. 22 (Bloomberg) -- Brazil's inflation through mid- August decelerated to the slowest pace in five months, bolstering confidence that the central bank will bring consumer prices back to target next year.

The inflation rate as measured by the benchmark IPCA-15 index decreased to 0.35 percent from 0.63 percent through mid- July as food prices eased, the national statistics agency said in a release today on its Web site. It was less than 0.38 percent median estimate in a Bloomberg survey of 35 economists.

``Clearly the big drop in food inflation is what explained major deceleration in inflation,'' said Tony Volpon, chief economist at Sao Paulo-based brokerage CM Capital Markets, in a telephone interview.

The central bank has raised interest rates three times since April, to 13 percent from a record low 11.25 percent, in a bid to cool domestic demand and inflation running near the 6.5 percent upper limit of the government's target range. Policy makers are expected to raise the benchmark rate to 14.75 percent by the end of the year, according to an Aug. 15 central bank survey of 100 economists.

Brazil's economy is showing signs of slowing in the face of a tightening monetary cycle and worsening outlook for its commodity exports.

Unemployment in July rose for the first time in five months, the national statistics agency said yesterday. Retail sales in June grew a less-than-expected 8.2 percent compared to the same period a year ago, slowing from a 11.1 percent in May.

Demand

Still, economists such as Volpon and Alexandre Lintz, an economist at BNP Paribas in Sao Paulo, think demand remains too robust for the central band to abandon its hawkish stance.

Price increases for services, which are more indicative of demand, accelerated to 0.52 percent through mid-August versus 0.24 percent last month, Volpon said.

``If you strip away food, there's nothing in the data suggesting a major downward shift in aggregate demand that policy makers are looking for,'' said Volpon.

Volpon and Lintz expect the bank to raise interest rates by another 0.75 basis points at its next meeting Sept. 10.

``The monetary authority is not out of the woods yet,'' he wrote in an e-mail to clients.

Today's report showed that the annual inflation rate for the 12 months through mid-August slowed for the first time in five months to 6.23 percent from 6.30 percent in mid-July. Month-on-Month food prices rose 0.25 percent, their lowest reading since November and down from 1.75 percent in mid-July.

The real weakened 0.6 percent to 1.6181 per dollar at 10:51 a.m. New York time from 1.6090 late yesterday.

To contact the reporter on this story: Joshua Goodman in Rio de Janeiro jgoodman19@bloomberg.net or

Last Updated: August 22, 2008 10:52 EDT