Brazil June Consumer Prices Rise Less Than Analysts Forecast

Brazilian consumer prices rose less in June than analysts forecast, reducing pressure on the central bank to boost the pace of interest-rate increases when it holds its monetary policy meeting next week.

Prices as measured by the benchmark IPCA index increased 0.26 percent in the month, the slowest in a year, the national statistics agency said today in Rio de Janeiro. The number was lower than every estimate from 35 economists surveyed by Bloomberg, whose median forecast was for a 0.33 percent rise. Annual inflation accelerated to 6.7 percent from 6.5 percent, compared with a median estimate of 6.77 percent.

The central bank will raise the benchmark Selic rate by 50 basis points rather than 75, as some traders have been betting in recent weeks, said Andre Perfeito, chief economist at Gradual Investimentos.

“I do believe now the bets for a greater hike in the Selic rate won’t materialize,” Perfeito said in a phone interview from Sao Paulo. “Fifty basis points is the right call now for monetary policy.”

Above-target inflation has hurt purchasing power and domestic consumption in Latin American’s biggest economy even as the government undertakes stimulus measures. Growth unexpectedly slowed in the first quarter, with household spending dropping to its lowest level since 2011. Finance Minister Guido Mantega on June 27 cited fiscal restraint in delaying new tax breaks, and days later President Dilma Rousseff said fiscal control helps contain inflation.

Spending Cuts

The government will announce spending cuts next week totaling less than 15 billion reais ($6.7 billion), Mantega said, according to the website of the G1 channel of Globo TV. Mantega said the main goal is meeting the primary surplus target of 2.3 percent of gross domestic product, he said.

Swap rates on the contract maturing in January 2015, the most traded in Sao Paulo today, fell one basis point, or 0.01 percentage point, to 9.74 percent at 10:20 a.m. local time. The real weakened 0.8 percent to 2.2663 per U.S. dollar.

“The worsening of family and business sentiment is partially fueled by price increases in segments with high visibility, such as food, fuel and public tariffs,” the central bank said in its quarterly inflation report released last week. “In the short-term, annual inflation still has a tendency to rise and the balance of risks in the prospective outlook is unfavorable.”

Food, Transport

Today’s inflation report showed food and beverage prices, which were largely responsible for the acceleration of headline inflation last year, rose 0.04 percent in June, the slowest since July 2011. Transport prices rose 0.14 percent as compared to a 0.25 percent fall in May in part due to public bus fares that were applied then canceled after protests.

The diffusion index, reflecting the extent to which inflation is widespread, fell to 45.7 percent in June from 47.1 percent in May, according to Perfeito.

The central bank’s monetary policy committee raised the benchmark rate by 50 basis points to 8 percent in May following a 25-basis-point increase in April. The committee will hold its next meeting on July 9-10. The bank targets annual inflation of 4.5 percent, plus or minus two percentage points.

Gross domestic product expanded 0.55 percent in the first quarter, less than the 0.9 percent median forecast in a Bloomberg survey. The economy expanded 0.9 percent last year, the worst performance since 2009. Economists surveyed by the central bank have cut their 2013 growth outlook for seven straight weeks to 2.4 percent.

Services Pressure

Annual inflation, at 6.70 percent, accelerated above the upper limit of the central bank’s target range. This will be the peak for annual inflation in 2013, Enestor dos Santos, principal economist for emerging markets at Banco Bilbao Vizcaya Argentaria SA, said by telephone from Madrid.

Still, economists surveyed by the central bank have increased their 2013 inflation outlook for three straight weeks to 5.87 percent, its highest level all year.

Service prices increases accelerated in June to 0.64 percent from 0.56 percent in May, pressured by near record low unemployment and rising real wages, according to Pedro Tuesta, senior Latin America economist for 4Cast Ltd. Unemployment in May was 5.8 percent, up from 4.6 percent in December.

The labor market “is giving, but mostly on the industrial side, not on the services side, and that’s one problem for the government,” Tuesta said by telephone from Washington. “The government needs to allow the labor market to ease and I’m not sure it wants to do that. I believe they won’t.”

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