Brazil's Inflation Surpasses 10% for First Time in 12 Years

  • Unemployment rises more than forecast as economy contracts
  • Central bank has signaled it will keep rates on hold next week

Brazil’s inflation exceeded 10 percent for the first time in 12 years, complicating President Dilma Rousseff’s efforts to revive an economy that is also battling higher-than-forecast unemployment.

Consumer prices rose 0.85 percent from Oct. 15 to Nov. 12, pushing the 12-month inflation rate to 10.28 percent, the national statistics agency said Thursday. The monthly gain, the fastest since mid-June, compares with the median estimate of 0.86 percent in a Bloomberg survey of 44 analysts.

As consumer prices in Latin America’s biggest economy continue to accelerate, Brazil’s central bank has delayed its plan of slowing inflation to its 4.5 percent target to 2017 from 2016. The bank has signaled it will keep rates on hold for a third consecutive meeting next week as it is caught between higher living costs and the deepest recession in 25 years.

Policy makers "of course will tread carefully, because Brazil GDP data on Dec. 1 are going to be quite dire,” said Edward Glossop, emerging market economist at Capital Economics in London. “Interest rates probably will remain at their current level for a prolonged period, possibly into 2017 at this stage.”

Unemployment in October rose to 7.9 percent, higher than all estimates, from
7.6 percent, the statistics agency said in a separate release Thursday. That’s its highest level since 2009. Economists surveyed by Bloomberg forecast the economy will contract 2.8 percent this year and 0.9 percent next year.

Despite rising unemployment, traders expect the central bank to resume interest rate increases next year as a weaker currency and a widening budget gap stoke price increases. The Selic rate will be lifted to as high as 16.25 percent by July from 14.25 percent, according to data compiled by Bloomberg.

“The market’s pricing in quite aggressive tightening now. We think that’s probably overdone,” Glossop said.

Swap rates on the contract due in January 2017 fell eight basis points to 15.37 percent at 10:02 a.m. local time, as traders pared the size of rate increases they expect. The real strengthened 0.4 percent to 3.7494 per U.S. dollar.

Higher unemployment was accompanied by a 7 percent drop in real wages in October from a year ago, according to the statistics agency. “It was very bad, worse than we expected,” Thais Zara, chief economist at Rosenberg Consultores Associados, said by phone.

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