Brazilian Tax Cuts Seek to Tame Inflation and Buoy Retailers

Brazil extended tax cuts on various consumer goods and provided a payroll tax cut for retailers in a bid to avoid price increases that would further stoke inflation, which quickened more than forecast by analysts in each of the past six months.

The government yesterday extended cuts to the IPI excise tax for automobiles, appliances, furniture and other goods, which had been scheduled to expire at the end of the year, Finance Minister Guido Mantega said. The government will also reduce the PIS/COFINS federal taxes on sales in 2013.

“Our philosophy is lowering taxes to reduce companies’ costs,” Mantega told reporters in Brasilia.

President Dilma Rousseff’s administration has lowered taxes, boosted spending and freed up credit to prop up Brazil’s economy, which is growing slower than the U.S. and all other major emerging markets.

Dozens of industries have already received payroll tax cuts, and retailers benefiting from the new cut include sellers of everything from sporting goods to perfume, though not supermarkets. Mantega said the government does not currently plan to reduce its tax on financial transactions such as currency derivatives, known as the IOF tax.

The IPI tax cuts increased sales of white line appliances by 30-40 percent in 2012, Mantega said. Auto sales reached a record 420,080 units in August, according to data from Brazil’s car manufacturer association known as Anfavea. Sales have since fallen to 311,772 units in November even as consumer confidence hit a nearly two-year high.

‘Non-Linear’

Prices of new automobiles fell 5.8 percent this month, according to yesterday’s inflation report from the national statistics institute.

Overall consumer prices jumped the most in 19 months, adding pressure on the central bank to raise interest rates next year to control inflation that’s quickening faster than economists have forecast.

Prices as measured by the IPCA-15 index rose 0.69 percent in the month through mid-December. The median estimate was for a 0.64 percent increase, according to 41 analysts surveyed by Bloomberg. Annual inflation, which has remained above the bank’s 4.5 percent target since 2010, accelerated to 5.78 percent.

The central bank last month kept the overnight rate unchanged after cutting borrowing costs by 5.25 percentage points since August 2011 --- the most among the Group of 20 nations -- as it eyes a “non-linear” convergence of inflation to its 4.5 percent target. The bank said it would keep rates at their all-time low for a “prolonged” period to stimulate growth.

“The so-called non-linear convergence to target isn’t taking place, it’s showing a divergence,” said Jankiel Santos, chief economist at Banco Espirito Santo de Investimento SA. “Even though the central bank has said it will not undertake any increase in interest rates in the next year in order to guarantee the economy’s recovery, under an inflationary regime it will be forced to respond.”

To contact the reporters on this story: Arnaldo Galvao in Brasilia Newsroom at agalvao1@bloomberg.net; David Biller in Rio de Janeiro at dbiller1@bloomberg.net

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