Brazil Prices Rise Most in Five Months on Food Costs

Brazil’s inflation quickened to the fastest pace in five months in September as food prices pushed the annual rate above the government’s target.

Consumer prices as measured by the benchmark IPCA index rose 0.45 percent in September from August, the government’s statistics agency said. Prices rose 4.70 percent from a year earlier. The readings were in line with the median estimates of economists surveyed by Bloomberg.

After raising interest rates by 2 percentage points this year, the central bank held its benchmark Selic rate unchanged at 10.75 percent on Sept. 1, saying it was adequate to keep inflation on target. The central bank will see today’s figure as confirmation of its view that short-term inflation is being driven by a temporary surge in food prices, said Solange Srour, chief economist in Rio de Janeiro at BNY Mellon ARX.

“If quicker inflation in the short term doesn’t contaminate expectations, the central bank will continue to hold rates for some time,” Srour said in a phone interview.

Today’s report showed that after three straight months of deflation, food prices jumped 1.08 percent in September from August.

Policy makers forecast inflation will slow to 4.6 percent next year. Brazilian economists predict the IPCA will end 2010 and 2011 above the government’s 4.5 percent target, according to a weekly central bank survey of about 100 analysts published Oct. 4.

Higher Estimates

The IPCA index may rise 5.07 percent this year and 4.92 percent in 2011, the survey showed. Economists have raised their estimate for year-end 2010 inflation in each of the past three weeks.

The rebound in inflation last month doesn’t warrant a reaction from the central bank, since it doesn’t have “monetary roots,” Moody’s said in a report distributed today.

“Tighter monetary policy will be ineffective and will only depress domestic demand unnecessarily,” the report said. “Even worse, a higher interest rate will aggravate the currency revaluation, which seems to be the policy makers’ new headache.”

Interest rates are already high enough to stop the economy from overheating, the report said.

Yields on interest rate future contracts fell. The yield on the contract due January 2012, the most traded on the Sao Paulo BM&F futures exchange, fell five basis points, or 0.05 percentage point, to 11.39 percent at 10:15 a.m. New York time.

Inflows, Prices

The real gained 0.1 percent to 1.6777 per dollar. Brazil’s currency jumped to a two-year high of 1.6632 on Oct. 4 as Japan’s unexpected interest-rate cut and a weakening dollar added to the allure of emerging-market assets.

The real has gained 38 percent against the dollar since the end of 2008, the third-best performance among the most-traded currencies after the Australian dollar and South African rand.

Yields on Brazil’s longer-term bonds are rising at the fastest pace in three months versus shorter-term debt as the government boosts taxes on foreign investment to curb gains in the real.

Traders expect policy makers to raise the benchmark Selic rate to 12 percent by September 2011, according to Bloomberg estimates based on interest rate futures contracts.

Brazil’s gross domestic product grew 1.2 percent in the three months ending in June from the previous quarter, cooling from a 2.7 percent expansion in the first quarter.

GDP jumped 8.8 percent from a year ago compared with a 9 percent expansion in the first quarter that was the fastest pace in 15 years. The central bank estimates Latin America’s biggest economy will grow by 7.3 percent this year.

Industrial production unexpectedly shrank 0.1 percent in August from July, as a stronger real weighed on exporters and re-stocking tailed off.

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