Rousseff Eliminates Brazil Federal Food Taxes to Stem Inflation

Brazil is cutting all federal taxes on staple foods in a bid to tame inflation, after a report showed yesterday consumer prices rose more than analysts forecast for an eighth straight month.

A weaker currency, record low borrowing costs and $23 billion in tax cuts failed to kick-start the economy last year. Instead, the measures helped fuel inflation that is running faster than in Mexico, Colombia or Chile and approaching the 6.5 percent upper limit of the central bank’s target range.

Eliminating the 9.25 percent PIS/Cofins taxes on staple foodstuffs will both rein in prices and stimulate the economy as Brazilians improve their ability to save and consume, President Dilma Rousseff said. The measure will reduce tax revenue by 7.3 billion reais annually.

“At no time has there been a lack of care for the control of inflation, because economic stability is fundamental for us,” Rousseff said in a televised address. “That’s also why we don’t stop looking for new ways to lower the cost of living for Brazilians.”

Consumer prices rose 0.6 percent in February, above the 0.49 percent forecast from 44 analysts surveyed by Bloomberg, the national statistics agency said in Rio de Janeiro yesterday. Annual inflation quickened to 6.31 percent and has exceeded the central bank’s 4.5 percent target for 30 months. Economists forecast 2013 inflation at 5.7 percent, according to the median estimate in the most recent central bank survey.

Multiple Benefits

Food and beverages accounted for more than half of February inflation. Last year they were the second-largest source of inflation after personal expenses, when their prices rose 9.9 percent. Food and drinks represented 23.9 percent of family budget in 2012.

The elimination of federal food taxes will do little to suppress inflation as consumers direct savings toward the purchase of services and drive their prices higher, said Pedro Tuesta, chief economist at 4Cast Inc.

“This aims to reduce pressure on inflation, but it hasn’t worked before and it won’t work again,” Tuesta said by telephone from Washington. “As long as income continues to grow, it will put pressure on prices. You can reduce the prices of some things, but other things will rise.”

Brazil’s state-controlled oil company Petroleo Brasileiro SA this week raised diesel prices by 5 percent after an increase earlier this year that pushed up transport costs. Inflation as measured by the IGP-M index that is 60 percent weighted in wholesale reached 8.3 percent in February, its highest level since July 2011.

Additional Measures

“We hope this lowers the price of these products and stimulates agriculture, industry, commerce and creates jobs,” Rousseff said. “With this decision, and with the revenue we have, this will increase the consumption of foods and cleaning products and there will still be money left over to save or increase the consumption of other goods.”

The central bank’s monetary policy committee unanimously decided to hold the benchmark rate at its record low for the third straight meeting on March 6. The committee’s statement said it “will monitor the evolution of the macroeconomic scenario until its next meeting, in order to define the next steps in its monetary policy strategy.”

Rousseff announced her plans last month to scrap all federal taxes on staple foodstuffs after last September vetoing a bill approved by Congress that would have done the same. The move would have cost the government 5.1 billion reais ($2.6 billion) per year, according to the Sao Paulo Industry Federation.

Rousseff also announced the elimination of the IPI tax for soap and sugar, and said March 15 the country will enact new consumer defense measures to improve service and transparency of both business and government. New legal instruments will “reward” practices that are good and “punish” those that are bad, she said.

“Brazil will supervise more rigorously, apply more fitting fines, raise awareness of companies, consumers and all society about the advantages of improved customer relations,” Rousseff said.