Brazil September Annual Inflation Speeds Up for Third Month

Brazil’s annual inflation accelerated in September for the third straight month, as the economy emerges from a year-long slowdown in response to government stimulus measures.

Prices as measured by the IPCA price index rose 5.28 percent, the national statistics agency said in Rio de Janeiro today. The rate has quickened every month since June and was the fastest since February. The median estimate from 31 analysts surveyed by Bloomberg was 5.26 percent. In the month, prices rose 0.57 percent, compared with 0.41 percent in August, with food and beverage prices jumping 1.26 percent.

“Even taking food costs out of the equation for the moment, inflation is still firming pretty much across the board,” Daniel Snowden, emerging markets analyst at Informa Global Markets, said by telephone from London. “This is making the 4.5 percent inflation target look extremely difficult to achieve in the next 12 months.”

President Dilma Rousseff’s administration in recent months has lowered taxes on company payrolls and consumer goods, reduced bank reserve requirements to spur lending and pressured banks to lower loan spreads, while the central bank has cut the benchmark interest rate by 500 basis points since August 2011 to a record low 7.5 percent. As a result, the largest emerging market after China has shown signs of picking up speed.

Retail Sales

Industrial production rose 1.5 percent in August from July, the third straight monthly increase and the biggest since May 2011. Retail sales climbed in June by 1.6 percent, the most since January, and beat analyst expectations with a 1.4 percent increase in July.

Swap rates on the contract maturing in January 2014 fell 14 basis points, or 0.14 percentage point, to 7.45 percent at 10:27 a.m. local time. The real was virtually unchanged at 2.0184 per U.S. dollar.

The central bank’s economic policy director, Carlos Hamilton, said on Sept. 27 that a spike in commodity prices means slowing the inflation rate to target by year-end would “imply too high a cost.” The target probably won’t be attained until the third quarter of 2013, he said. The bank targets inflation of 4.5 percent plus or minus two percentage points.

The September jump in food prices was the biggest since December 2010. Clothing rose 0.89 percent, personal expenditures were up 0.73 percent and housing 0.71 percent.

Economists surveyed by the central bank increased for the 12th straight week their forecast for 2012 inflation, to 5.36 percent.

’Dangerous Game’

“This is a dangerous game, especially in a country that is well-known for its hyperinflation past,” Jankiel Santos, chief economist at Espirito Santo Investment Bank, said by telephone from Sao Paulo on Oct. 4. “If we start seeing the central bank being more lenient toward inflation, everybody is going to start being more lenient toward inflation.”

Economists surveyed by the bank expect inflation to reach 5.48 percent in 2013. If inflation doesn’t converge to target next year, the bank would risk further undermining its credibility and would first resort to macro-prudential measures and then allow some strengthening of the real, Santos said. A stronger real helps to control inflation by making imported goods less expensive.

’Dirty Band’

The real has lost 7.5 percent of its value against the dollar this year, the worst performing of the 16 major currencies tracked by Bloomberg, as the government imposed barriers on capital inflows and purchased dollars in the spot and futures markets.

The central bank is unofficially pegging the currency in a “dirty band” of between 2 reais and 2.1 reais per dollar to maintain the competitiveness of local industry, said Tony Volpon, head of emerging market research for the Americas at Nomura Securities.

“I expect the bank will change the peg when 12-month inflation reaches 5.75 percent,” Volpon said by telephone from New York on Oct. 2.

“Inflation is within the target limits and this will continue,” Finance Minister Guido Mantega said Sept. 19. “The policy of low interest rates will continue.”

Traders this week have increased bets that the central bank will cut the Selic rate by 25 basis points at the policy meeting on Oct. 10 before raising it in the first half of next year.

Faster Growth

Brazil’s gross domestic product expanded at a 1.6 percent annualized rate in the second quarter, up from 0.5 percent in the first quarter. The central bank last week cut its forecast for GDP growth this year to 1.6 percent from 2.5 percent, adding that the economy will grow 3.3 percent in the second quarter of 2013.

Faster GDP growth at the beginning of next year will generate inflation that threatens to exceed 6.5 percent, prompting the bank to take forceful action to contain it, Paulo Vieira da Cunha, partner at Tandem Global Partners LLC, said by telephone from New York on Oct. 4.

“If at a certain point they feel that they have to bring inflation down, and bring it down quickly to be credible and to be politically acceptable, that is going to have a large output effect,” said Vieira da Cunha, who is a former central bank board member.

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