Brazil December Inflation Quickens More Than Forecast

Brazil’s consumer prices in December rose more than economists forecast, increasing doubts that the central bank will be able to maintain interest rates at a record low this year.

Prices as measured by the IPCA index rose 0.79 percent in December, the national statistics agency said today in Rio de Janeiro. That was more than every estimate from 34 economists surveyed by Bloomberg, whose median forecast was for an increase of 0.74 percent. Inflation has exceeded estimates for the sixth straight month. Annual price increases quickened to 5.84 percent from 5.53 percent in November, compared with a forecast of 5.79 percent from 30 economists surveyed.

President Dilma Rousseff’s administration has enacted dozens of measures to rev up the world’s second-largest emerging economy, and the central bank since August 2011 has cut its benchmark lending rate by the most among Group of 20 nations, lowering it by 5.25 percentage points to a record 7.25 percent. So far, the measures have failed to trigger a broad-based recovery, and inflation in 2012 exceeded the 4.5 percent midpoint of the bank’s target for the third straight year.

“It doesn’t look good,” Luciano Rostagno, chief strategist at Banco WestLB do Brasil SA, said by telephone from Sao Paulo. “They will eventually have to be more realistic and raise rates this year, otherwise they will lose the credibility that was built over the last decade.”

Retail Sales

Brazil’s gross domestic product grew 1 percent last year and will expand 3.3 percent in the four quarters through the third quarter of 2013, the central bank estimates. While retail sales rose 9.1 percent in October from last year, industrial production has lagged, with output falling on an annual basis in 14 of 15 months through November.

Swap rates on the contract maturing in January 2015, the most traded in Sao Paulo today, fell three basis points, or 0.03 percentage point, to 7.74 percent at 10:42 a.m. local time. The real strengthened 0.1 percent to 2.0379 per U.S. dollar.

The government is targeting an average 20 percent cut in power rates starting next month, which had been expected to help tame inflation. With hydroelectric reservoir levels low because of droughts in Brazil, the grid is resorting to costlier thermal generation that may limit the decline in electricity prices.

December consumer prices rose the fastest since March 2011, led by personal expenses that jumped 1.6 percent, and food and beverages that increased 1.03 percent. Annual inflation was led by the same components, which increased 10.2 percent and 9.9 percent, respectively.

Historic Lows

Even as growth has stalled, unemployment has remained near historic lows, reaching 4.9 percent in November, adding pressure on prices that are rising faster than in Chile, Colombia, Mexico and Peru.

“Inflation is not going to come down until the labor market eases,” Pedro Tuesta, economist at 4Cast Inc., in a phone interview from Washington on Jan. 9. “The biggest pressure on inflation is on the service side, which is labor intensive.”

Rousseff’s government worked last year to weaken the real, which has declined 11.6 percent over the past year, the second-worst performance among 16 major currencies tracked by Bloomberg. While the weaker currency boosts the competitiveness of local industry, it also fans inflation by making imported products more expensive.

“In the short term, inflation has proved resilient, but the prospects indicate a return to a declining trend throughout 2013,” central bank President Alexandre Tombini said in a statement posted on the bank’s website. Brazil’s inflation has remained within the 2.5 percent to 6.5 percent target range for the past nine years, Tombini said.

(Corrects central bank growth forecast in fifth paragraph of story originally published Jan. 10.)
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