Brazil's Inflation Quickens More Than Forecast in October

  • Fuel price increase is biggest driver of monthly inflation
  • Swap rates rose on bets central bank to resume lifting rates

Brazil’s consumer prices in October rose more than economists forecast as the government struggles to rein in public spending to help the central bank tame above-target inflation.

Monthly inflation as measured by the benchmark IPCA index accelerated to 0.82 percent from 0.54 percent in September, the national statistics agency said in Rio de Janeiro. That was faster than the median 0.80 percent estimate from 41 economists surveyed by Bloomberg. Inflation in the 12 months through October jumped to 9.93 percent from 9.49 percent a month earlier.

Brazil’s inflation is running at the fastest pace in almost 12 years, yet a deepening recession is keeping the central bank from raising rates even further. As the government fails to implement fiscal austerity, inflation expectations have continued creeping upward, which has forced policy makers to push back their estimate of when they can bring consumer price increases back to the 4.5 percent target.

“Despite the deeper recession Brazil is facing, inflation isn’t slowing down,” Luciano Rostagno, chief strategist at Banco Mizuho do Brasil, said by phone from Sao Paulo. “Markets are pricing in the central bank will eventually be forced to resume the hiking cycle.”

Swap rates on the contract due January 17 rose 7 basis points to 15.44 percent at 9:51 a.m. local time. The real weakened 0.16 percent to 3.7860 per U.S. dollar. It has dropped 29.8 percent this year, the most of all 16 major currencies tracked by Bloomberg.

Food and beverage prices in October rose 0.77 percent, after a 0.24 percent rise in September, the statistics agency said in its report. Transport prices rose 1.72 percent, including a 6.09 percent jump in fuel prices, the biggest driver of inflation.

The central bank has held rates at their highest level since 2006 with the country sliding into recession. With a weaker exchange rate keeping the pressure on consumer prices and inflation nearing double digits, policy makers pushed back to 2017 from 2016 the deadline to slow inflation to its official target.

“The central bank will adopt the necessary measures to meet the objectives of its target regime and bring inflation back to the 4.5 percent target in 2017,” according to a slide show on Thursday from Altamir Lopes, central bank director for economic policy.

Traders in the swaps market reinforced bets Thursday that the central bank will resume interest rate increases as early as this month after Lopes’s comments.

In September, state-run oil giant Petrobras announced it would raise fuel prices for the first time in a year. The increases for gasoline and diesel will add 14 basis points to inflation in 2015, according to Itau Unibanco SA. Economists surveyed by the central bank forecast inflation will slow to 9.91 percent by year-end, and to 6.29 percent by the end of 2016.

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