Brazil Prices Rise More Than Economists Forecast in May

Brazil’s consumer prices rose more than economists predicted in May, as the central bank signals it will keep interest rates on hold.

Inflation as measured by the benchmark IPCA index slowed to 0.46 percent from 0.67 percent in April, the national statistics agency said today in Rio de Janeiro. That was faster than the 0.38 median forecast from 41 analysts surveyed by Bloomberg. Annual inflation quickened to 6.37 percent from 6.28 percent, marking its fastest rate since June.

Inflation near the top of the government’s target range is curbing consumers’ purchasing power and undermining confidence ahead of October elections. President Dilma Rousseff’s administration has attempted to stave off price increases through fiscal and monetary tightening without strangling economic growth. The central bank boosted the benchmark Selic nine straight times before pausing last month, citing slower economic activity.

“It’s core inflation that’s picking up and that’s a real concern for the central bank,” Neil Shearing, chief emerging-markets economist at Capital Economics, said by phone from London. “It’s reflective of a more ingrained, entrenched inflation in the wider economy. That means the onus is on the central bank to potentially respond more aggressively.”

Core inflation excluding volatile food prices and fuel accelerated to 0.54 percent from 0.52 percent the prior month, according to calculations by Ibiuna Investimentos.

Swap rates on the contract due January 2017 fell eight basis points, or 0.08 percentage points, to 11.56 percent at 10:08 a.m. local time. Brazil’s currency, the real, strengthened 0.7 percent to 2.2465 per U.S. dollar.

Residential Items

Food and beverage prices rose 0.58 percent on the month after increasing 1.19 percent in April, the statistics agency said in today’s report. Prices of residential items increased 1.03 percent, from 0.2 percent the prior month. Personal expenses jumped 0.8 percent after rising 0.31 percent in April.

“We didn’t expect personal expenses and household items to rise as much as they did,” Pedro Tuesta, senior Latin America economist at 4Cast Ltd., said by phone from Washington. “That was a bit of a surprise.”

Central bank directors in their last monetary policy committee meeting held the Selic unchanged after 375 basis points of increases in the year through April. The bank targets inflation of 4.5 percent, plus or minus two percentage points.

’Less Intense’

“The expansion of domestic activity tends to be less intense in comparison with 2013,” policy makers said in the minutes of their May 27-28 meeting published yesterday. “The committee assesses that the effects on inflation from the elevation of the Selic rate, in part, have yet to materialize.” The bank also cited “relatively modest levels of confidence.”

The central bank at the start of the year extended for six months a program to bolster the currency after it depreciated 13 percent in 2013, offering as much as $200 million in foreign exchange swaps auctions daily through at least June 30. The real has appreciated 5.2 percent in 2014.

Regulated prices rose 4.09 percent in the 12 months through May versus 3.8 percent in April. Such prices will rise about 5 percent in 2014, central bank President Alexandre Tombini said at an event May 6.

Consumer Confidence

Analysts polled May 30 by the central bank estimate Brazil’s currency will weaken to 2.4 per dollar by the end of 2014 as inflation reaches 6.47 percent. Consumer confidence as measured by the Getulio Vargas Foundation fell in May to the lowest level in more than five years.

Rousseff’s support from prospective voters in a Datafolha poll published yesterday fell to 34 percent from 37 percent in the previous survey. The presidential election is scheduled for October. The poll, which showed Aecio Neves with 19 percent and Eduardo Campos with 7 percent, had a margin of error of plus or minus two percentage points.

“The big unknown in all of this is what happens to pre-election spending if polls show another fall in support for Dilma,” Shearing said. “Do they loosen the purse strings ahead of election to get more support? What impact will that have in the following 12-18 months?”

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