Bus Fare Reversal Aids Brazil Inflation Fight

Brazil’s inflation slowed more than analysts forecast in mid-July after street protests forced local governments to roll back an increase in urban bus fares.

Consumer prices as measured by the IPCA-15 price index rose 0.07 percent from June 14 to July 12, the national statistics agency said in a report published on its website today. That was less than the median forecast of a 0.11 percent increase from 31 economists surveyed by Bloomberg. Annual inflation slowed to 6.4 percent, falling back into the central bank’s 2.5 percent to 6.5 percent target range.

More than 1 million people took to the streets last month after inflation eroded purchasing power and economic growth remained sluggish. Demonstrations were sparked by bus fare increases, since canceled, which helped ease consumer prices. The central bank has embarked on the largest cycle of interest rate increases among the world’s major economies to tame inflation that has remained above the 4.5 percent midpoint since September 2010.

“My call is that the worst is over, and we’re at the beginning of an inflection,” Roberto Padovani, chief economist at Votorantim Ctvm, said by phone from Sao Paulo. “We are starting to see better inflation dynamics, and since inflation is under control, this will help reinforce the central bank’s credibility.”

Swap Rates

Swap rates on the contract maturing in January 2015, the most traded in Sao Paulo today, rose 1 basis point, or 0.01 percentage point, to 9.34 percent at 11:26 a.m. local time. The real weakened 0.4 percent to 2.2367 per U.S. dollar.

Transport prices dropped 0.55 percent in the month through July 12, after rising 0.1 percent the prior month, the agency said. Food and beverage prices contracted 0.18 percent in the same period, down from a 0.27 percent increase through mid-June.

The central bank’s monetary policy committee said a weaker currency creates short-term inflation pressure and “considers appropriate to continue the current pace” of interest rate increases,’’ according to the minutes of the July 9-10 meeting, which were published yesterday.

Policy makers raised the benchmark interest rate by 50 basis points at each of their past two meetings to 8.5 percent, following a 25-basis-point increase in April. The real has weakened 9 percent against the dollar in the past two months, the worst performance among the 16 most-traded currencies tracked by Bloomberg.

Cutting Estimates

Economists forecast 5.8 percent inflation and 2.31 percent economic expansion in 2013, cutting their growth estimate for the ninth straight time, according to the latest central bank weekly survey. The analysts forecast the benchmark rate will reach 9.25 percent at year-end.

Services inflation accelerated to 0.69 percent in the month, while twelve-month services inflation through mid-July was 8.6 percent, according to Flavio Serrano, senior economist at Banco Espirito Santo de Investimento SA.

“Services sector inflation is at a really high level and this is somewhat concerning,” Serrano, who forecasts 2014 inflation of 6 percent, said by telephone from Brazil. “Inflation in Brazil is not as good as the monthly reading suggests.”

Personal expenses rose 1.08 percent through mid-July, up from 0.37 percent the prior month and marking the largest impact on consumer price increases. Housing prices rose 0.6 percent

The jumps in personal expenses and housing prices weren’t enough to prevent the diffusion index, which measures how widespread inflation is in the economy, from falling. The index fell to 56 percent in mid-July from 62 percent the prior month, according to Ibiuna Investimentos in Sao Paulo.

The reduction in the diffusion index is “good news for the central bank,” Pedro Tuesta, senior Latin America economist for 4Cast Ltd, said by telephone from Washington.

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