Brazil Inflation Unexpectedly Jumps to Highest Since 2003

  • Consumer inflation rates higher than forecast by all analysts
  • Food and beverage prices push inflation higher in February

Brazil’s annual inflation surprised analysts by accelerating in the month through mid-February after the central bank refrained from raising borrowing costs and the government proposed loosening its fiscal targets.

Annual inflation as measured by the IPCA-15 index unexpectedly quickened to 10.84 percent -- its highest level since November 2003 -- from 10.74 percent, the national statistics agency said Tuesday. That compares to a median estimate for a 10.73 percent rate forecast by 31 analysts. Inflation accelerated to 1.42 percent from 0.92 percent a month earlier, versus a median estimate of 1.32 percent.

Central bank board members have repeatedly said in recent days they expect inflation to slow as the deepening recession and the end to most government-regulated fare increases take pressure off consumer prices. Yet analysts are skeptical the disinflation will prove steep enough for policy makers to meet their annual inflation target of 4.5 percent this year or next.

“It’s quite concerning, inflation remains very disseminated,” Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., said by phone from New York. “The inertial forces are extremely strong and the only way to break the back of inflation is with a very decisive policy response, and that should involve both a monetary and fiscal strategy.”

Swap rates on the contract due in January 2017 rose 5 basis points to 14.23 percent at 10:05 a.m. local time. The real was virtually unchanged at 3.9472 per U.S. dollar. It has lost 27 percent over the past 12 months.

In a monthly comparison, prices for food and beverages increased 1.92 percent, more than the 1.67 percent increase in the month through mid-January, the statistics agency said. Transport prices jumped 1.65 percent after a 0.87 percent increase the prior month, and education costs rose 5.91 percent. The three components accounted for three-quarters of the monthly spike in inflation, led by food and beverages.

“The biggest problem from our perspective is food inflation has really taken us by surprise,’’ said Edward Glossop, an emerging markets economist with London-based Capital Economics. “The weaker real has pushed up local currency value of food imports, and the other factor is the temporary supply-side disruptions to various food categories.’’

Core inflation excluding volatile food prices and fuel also accelerated to 1.24 percent, from 0.66 percent the prior month, according to Ibiuna Investimentos.

While policy makers have signaled in their latest statements that inflation is running too fast to consider a rate cut, they surprised traders and analysts last month when they refrained from an increase in the benchmark rate. Economists surveyed weekly by the central bank now expect borrowing costs to remain unchanged at 14.25 percent for the remainder of the year.

“Fiscal policy has not been tightened at the speed necessary to control inflation so the central bank is basically alone in this fight,” said Luciano Rostagno, chief strategist at Banco Mizuho do Brasil. “There’s no reason to expect inflation will move back to the central bank’s tolerance band this year despite the deep recession the economy is facing.”

Accelerating inflation adds to a long list of economic indicators that continue to deteriorate in Brazil. Among the few areas showing signs of improvement is the balance of payments which have benefited from a weaker currency. The country’s current account deficit in the 12-month period through January narrowed to 2.94 percent of GDP from 3.32 percent in the prior month, the central bank reported Tuesday.

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