Brazil Inflation Quickened to Fastest Pace Since 2005

Brazil’s consumer prices rose in January at the fastest pace since 2005, fueled by food prices and an increase in bus fares at the start of the year.

Prices, as measured by the benchmark IPCA index, rose 0.83 percent last month, pushing the annual rate to 5.99 percent, the national statistics agency said today in Rio de Janeiro. The monthly gain, more than a 0.81 percent median estimate in a Bloomberg survey of 32 analysts, matched the November 2010 rate, which was the fastest since a 0.87 percent jump in April 2005.

A jump in food prices coupled with domestic demand are stoking inflation, which has exceeded the midpoint of the central bank’s target range in the past five months. Traders are wagering the central bank will lift the benchmark interest rate for a second straight time next month in a bid to contain the fastest inflation in 26 months.

“Commodity prices became a challenge for monetary policy across the world and explains why the central bank resumed interest rate increases,” Roberto Padovani, chief economist at Banco WestLB do Brasil SA, said in a phone interview. “In Brazil, the issue is what are the tools available to contain inflation and what will be the size of interest rate increases.”

Yields on interest rate futures contract maturing Jan. 2012, the most traded in Sao Paulo, fell two basis points to 12.34 percent at 7:11 a.m. New York time. The real strengthened 0.2 percent to 1.6755 per U.S. dollar.

Transportation

Transportation costs rose 1.55 percent in January, fueled by a 4.13 percent increase in bus fares. Food prices rose 1.16 percent, less than the 1.32 percent jump in December. Meat prices, which had been fueling inflation, fell 0.19 percent after a 2.25 percent increase in December, the agency said.

Finance Minister Guido Mantega said he expects inflation to begin slowing in March as transportation costs and school fees begin to ease. Increases in global commodity prices pushed inflation higher in January, he told reporters in Brasilia.

Brazilian food prices may decline as the country’s crops enter the market, according to the Agriculture Ministry, which said in an e-mailed report that farmers have already harvested about 80 percent of this year’s crop.

Global food costs monitored by the United Nations jumped 25 percent last year, reaching a record in December. There have been protests in Algeria and Egypt while governments from Beijing to Belgrade are increasing imports, limiting their exports or releasing stockpiles.

Interest Rates

Policy makers raised the overnight rate last month to 11.25 percent from 10.75 percent and said they will rely on higher borrowing costs and measures to curb credit growth to rein in consumer prices.

The central bank in December raised capital and reserve requirements for local banks to slow consumer lending, removing 61 billion reais from circulation. The higher capital requirements are aimed at reducing the maturity of consumer loans, especially for car purchases.

While traders, according to yields on interest rate futures, are wagering the central bank will push rates up to 13 percent by year end, Padovani forecast the Selic won’t surpass 12.25 percent as inflation starts to ease in the second quarter.

Brazil targets inflation of 4.5 percent and has a plus or minus two percentage point leeway to accommodate for price shocks.

To slow inflation, the central bank is also counting on spending cuts to ensure a budget surplus before interest payments equal to 3 percent of gross domestic product, according to the minutes of their Jan. 18-19 meeting.

The central bank’s assumptions about fiscal policy would require President Dilma Rousseff to slash the 2011 budget by at least 70 billion reais ($41.7 billion), Alexandre Schwartsman, chief economist of Banco Santander SA in Sao Paulo, wrote in a note to clients yesterday.

Schwartsman said yesterday in an interview from Sao Paulo that inflation this year could exceed the 6.5 percent upper limit of the bank’s target range.

To contact the reporter on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net; Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net

To contact the editors responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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