Brazil Posts Fastest Annual Inflation in Almost a Decade

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Brazil posted the fastest inflation in almost a decade as the currency tumbles amid forecasts for Latin America’s largest economy to contract this year.

Consumer prices rose 7.70 percent in the 12 months through February, the most since May 2005 and exceeding the estimates of all 36 economists surveyed by Bloomberg. Monthly inflation as measured by the benchmark IPCA index was 1.22 percent, the national statistics agency said Friday in Rio de Janeiro.

Faster inflation is depressing confidence as growth sputters. Brazil’s real is posting the biggest decline among major currencies this year, fueling increases in prices for imports as the government allows some regulated prices to rise after posting a record budget deficit last year. The central bank this week boosted benchmark borrowing costs to the highest level in six years in a bid to tame inflation that has exceeded their target since September 2010.

“The central bank has to be very, very careful, and can’t look at this as just electricity prices being normalized,” Alberto Ramos, Latin America chief economist at Goldman Sachs & Co., said by phone from New York. “They cannot count on a weak economy to bring down inflation. If they don’t get a grip on inflation, inflation will bring the economy down. The best thing they can do is hike rates.”

Swap rates on the contract due January 2017 rose eight basis points, or 0.08 percentage point, to 13.25 percent at 10:38 a.m. local time. The real weakened 1.2 percent to 3.0379 per U.S. dollar and has fallen 12.5 percent this year, the most among major currencies tracked by Bloomberg.

Transport Prices

Food and beverage prices in February rose 0.81 percent, after a 1.48 percent rise in January, the statistics agency said in today’s report. Transport prices jumped 2.2 percent, including an 8.42 percent increase in gasoline, after rising 1.83 percent the month before, and education prices increased 5.88 percent.

To slow inflation, policy makers have raised the benchmark rate four straight times since Rousseff won re-election in October, most recently at their policy meeting ended March 4, to 12.75 percent. Economists in the latest central bank survey forecast one additional quarter-point increase to the Selic by year-end.

Complicating the central bank’s task is the weaker currency. The real yesterday fell past 3 per dollar for the first time in more than a decade. The central bank’s program to sell daily currency swaps that has helped to support the real is set to run through March 31, after which it could be ended or extended with new terms.

‘Lot of Pressure’

“The environment for the bank is worse,” Enestor dos Santos, principal economist at Banco Bilbao Vizcaya Argentaria, said by phone from Madrid. “On the one hand inflation is higher than people were expecting and on the other economic activity is decelerating much more than expected. They are under a lot of pressure.”

Policy makers target inflation of 4.5 percent plus or minus two percentage points. Central bank President Alexandre Tombini has said inflation will converge to 4.5 percent by the end of 2016, a level Brazil last achieved in 2010.

The central bank should shift its signaling to indicate the target will only be attained by 2017, Octavio de Barros, Banco Bradesco SA’s chief economist, wrote in a note yesterday. Analysts surveyed by the central bank expect inflation to slow to 7.47 percent by year-end and to 5.5 percent in 2016, with the economy contracting 0.58 percent this year.

Regulated prices for items such as electricity, gasoline and buses rose 2.37 percent in February, the statistics institute said. In the preceding 12 months, they rose 9.66 percent. Such increases are hurting consumer confidence, which in February reached its lowest level since the Getulio Vargas Foundation’s series began nearly a decade ago.

‘Temporary Change’

Electricity prices rose more than expected in February and, given another round of electricity price increases in March, inflation should accelerate to around 1.35 percent, according to Banco BESI’s chief economist Jankiel Santos and Carlos Kawall, chief economist at Banco Safra.

“It’s important that monetary policy remains vigilant so that this temporary change, this relative price adjustment, does not become a source of inflation,” Finance Minister Joaquim Levy said Feb. 23, referring to government-regulated items. “Obviously, more disciplined fiscal policy helps in that process.”

While regulated prices are boosting headline inflation, consumer price increases remain under pressure from many directions, according to Goldman’s Ramos. The cost of eating out rose 9.8 percent in the year through February, as automobile maintenance rose 10.4 percent and home repairs rose 11.1 percent.

“It’s true that gasoline, electricity, and urban bus transportation prices that were repressed for many years are being normalized, but many other things that have nothing to do with that are sustaining very high rates of increases,” he said. “You look at haircuts, condo fees, meals in restaurants. It’s just unbelievable.”