Brazil Inflation Exceeds Forecast as Rousseff Raises Tariffs

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Brazil’s inflation unexpectedly accelerated in May after President Dilma Rousseff increased government-controlled prices to shore up public accounts. Swap rates rose.

Consumer prices as measured by the benchmark IPCA index rose 0.74 percent last month, the national statistics agency said in Rio de Janeiro. That was faster than last month's 0.71 percent rate and exceeded the estimates of all 42 economists surveyed by Bloomberg, whose median forecast called for a 0.59 percent increase. Inflation in the 12 months through May quickened to 8.47 percent from 8.17 percent a month earlier.

From electricity to water, sewage and lottery tickets, Rousseff’s administration is increasing regulated prices after they were held down during her first term to tame inflation. That has helped push annual inflation to its fastest in more than a decade, and the central bank has responded by boosting borrowing costs six consecutive times.

“The number itself is pretty bad, but the details are less concerning when you drill down,” Neil Shearing, chief emerging markets economist at Capital Economics, said by phone from London. “It was highly driven by an increase in food inflation as well as regulated price increases.”

Swap rates on the contract due January 2017 rose 12 basis points, or 0.12 percentage point, to 13.7 percent at 1:24 p.m. local time as traders reinforced bets policy makers will increase the benchmark rate by as much as 50 basis points in July.

Electricity Prices

Food and beverage prices in May rose 1.37 percent, after a 0.97 percent rise in April, the statistics agency said in today’s report. Housing prices rose 1.22 percent, due to a 2.77 percent increase in electricity costs that was the biggest contributor to the month’s inflation. The price for games of chance rose 12.76 percent.

Consumer confidence as measured by the Getulio Vargas Foundation has plummeted since Levy began raising regulated prices. Families are coping with electricity costs that have jumped 41.9 percent so far this year, according to the statistics institute.

The lottery price increase also added four basis points to May’s inflation, and it will be more than double that in June, Flavio Serrano, senior economist at BESI Brasil, said by phone.

Benchmark Rate

With regulated prices pushing up inflation, the central bank raised the benchmark Selic by a half point at its last policy meeting, to 13.75 percent.

Core and services inflation slowed in May, to 0.31 percent from 0.61 percent excluding regulated prices and food at home, according to Ibiuna Investimentos. That won’t make it any easier for the central bank to signal a reduction in the pace of interest rate increases, BESI’s Serrano said.

“The speech is likely to remain strong against inflation,” Serrano said by phone from Sao Paulo. “Inflation in the very short term is running much higher than what we were expecting, and I think higher than what the central bank was expecting.”

Policy makers will release the minutes of their June 2-3 meeting on Thursday.

Central Bank

The central bank has reiterated its intention to bring inflation to the 4.5 percent target by the end of next year. By comparison, economists surveyed by the bank June 5 forecast it will slow to 5.5 percent after reaching 8.46 percent in December.

They also forecast the economy will contract 1.3 percent in 2015, which would be the worst result in 25 years. In addition to weak activity, fiscal restraint may ease pressure on consumer price increases.

Despite the ongoing recession and deterioration of the labor market, 12-month inflation of non-regulated items is still 6.82 percent and services inflation has stayed above 8 percent for 31 months, Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., wrote in a note to clients.

“The stickiness of inflation and the intensification of inflationary pressures at the margin could move the monetary policy needle toward another 50 basis-point Selic rate hike at the end-July Copom meeting,” Ramos said.

Credit Suisse today increased its 2015 inflation forecast to 9 percent, from 8.5 percent previously, according to a note from analysts including Nilson Teixeira before release of the data. Bank of America Merrill Lynch did the same following release of the data, given higher food and regulated prices, according to a note from chief Brazil economist David Beker.

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