Brazil CPI Slows Less Than Forecast as Gas Prices Rise

Brazil’s broadest measure of inflation slowed less than analysts expected as the government struggles to rein in consumer prices that will be pressured by new fuel price increases. Swap rates rose.

Wholesale, consumer and construction prices, as measured by the IGP-M price index, rose 0.34 percent this month, down from a 0.68 percent jump in December, the Getulio Vargas Foundation said on its website today. The gain compares with a median estimate of a 0.32 percent increase from 29 analysts surveyed by Bloomberg. The index, which is weighted 60 percent in wholesale prices, rose 7.91 percent in the past 12 months.

President Dilma Rousseff announced this month cuts to utility rates as part of plan to improve competitiveness and tame consumer price increases that have exceeded the government’s 4.5 percent target in the past 28 months. That opened the door for state-controlled oil company Petroleo Brasileiro SA to say yesterday that it would raise gasoline and diesel prices by 6.6 percent and 5.4 percent, respectively.

The increase in fuel prices is less than Petrobras needs although “it will be very difficult for the government to accept new increases, especially when inflation is such a big problem,” Pedro Tuesta, chief economist at 4Cast Inc., said by telephone from Washington.

Swap rates on the contract maturing in January 2015, the most traded in Sao Paulo today, rose two basis points to 7.89 percent at 9:24 a.m. local time. The real was little changed at 1.9853 per U.S. dollar.

Inflationary Risks

While inflationary risks have worsened in the “short term,” Brazil’s economy is recovering slower than expected, the central bank said in minutes of its Jan. 15-16 policy meeting, when it kept interest rates at a record low 7.25 percent. The bank in the minutes forecast a 5 percent increase in gasoline prices this year and an 11 percent drop in residential power prices.

The new fuel prices at the refinery will bump prices at the pump up by 4 percent to 5 percent, adding between 15 and 20 basis points to consumer inflation, said David Beker, the chief Brazil economist at Bank of America Merrill Lynch. The gap between Brazil’s fuel prices and international prices will stand at about 10 percent after the change that is effective today, according to Beker.

“No one expected them to clean the whole difference,” Beker said by telephone from Sao Paulo. “At the end of the day, given there is still a difference, the government is still using Petrobras to control inflation.”

Economists in the latest central bank survey forecast consumer inflation of 5.65 percent this year and 5.5 percent in 2014. Inflation, as measured by the benchmark IPCA-15 index, accelerated for the fourth straight month through mid-January to 6.02 percent, the fastest pace in a year.

Food Prices

Prices in the IGP-M index were driven by higher consumer food prices, which rose 2 percent. Wholesale prices fell by 1.4 percent, as compared to a 1.1 percent increase in December, easing pressure on consumer prices that should rise less than 50 basis points over each of the next three to four months even when accounting for the fuel price hike, Beker said.

Instead of raising borrowing costs, which could undermine efforts to boost growth from an estimated 1 percent last year, the central bank has been focusing its inflation-fighting efforts on the currency. This week the real has rallied 2.8 percent, past the 2 per dollar barrier for the first time in almost seven months, as the central bank sold foreign-exchange swap contracts in a surprise auction.

“As long as inflation doesn’t remain sticky at 6 percent to 6.5 percent, Brazil’s central bank probably won’t act,” Neil Shearing, chief emerging markets economist at Capital Economics Ltd., said by telephone from London. “There’s an acknowledgment that to get inflation down to target there would have to be tighter monetary policy.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE