Brazil Inflation Surprises With Slowdown to Single Digits

  • Consumer prices increased by less than all economist forecasts
  • Unemployment jumps to 8.2 percent, exceeding median outlook

Brazil’s inflation slowed more than all analysts forecast in the 12 months through mid-March as joblessness rises and the economy heads toward its second straight year of contraction.

Annual inflation as measured by the IPCA-15 index decelerated for the first time in 16 months, to 9.95 percent from 10.84 percent, the national statistics agency said Wednesday. That was less than estimated by all 31 economists surveyed by Bloomberg, whose median forecast was 10.08 percent. Consumer prices increased 0.43 percent in the month through mid-March from 1.42 percent a month earlier.

Inflation’s return to single-digits was anticipated by the monetary policy committee of Brazil’s central bank, known as Copom, as the recession continues to bite into demand and the impact of regulated price adjustments fades. With the currency strengthening and political strife weighing on the outlook for economic turnaround, economists have pared 2016 inflation outlooks. Yet inflation is expected to exceed the ceiling of the central bank’s target range for the second straight year even as the job market deteriorates.

“To some degree it vindicates the Copom decision to not hike rates further,” Edward Glossop, emerging-market economist at Capital Economics Ltd, said by phone from London regarding the consumer price data. “Going forward the bigger picture is that inflation is still high, and it is going to be a very slow grind lower.”

Unemployment in six Brazilian metropolitan areas rose to 8.2 percent in February, from 7.6 percent the prior month, the statistics institute said in a separate report. That was the highest since 2009, and more than the 8.1 percent median forecast from economists surveyed by Bloomberg.

Swap rates on the contract due in January 2017 fell 3 basis points to 13.68 percent at 11:17 a.m. local time. The real lost 1.8 percent to 3.64 per U.S. dollar, after having strengthened the most among 16 major currencies this month.

Prices for food and beverages increased 0.77 percent in the month through mid-March, less than half the 1.92 percent pace in the prior period, the statistics agency said. Transport prices rose 0.45 percent, less than one-third the pace of the prior month. Housing prices fell 0.52 percent due to a 2.87 percent plunge in electricity costs, which exerted the largest individual impact in slowing mid-March inflation.

Central bank President Alexandre Tombini has said repeatedly that policy makers foresee inflation easing in the first half of the year as a recession diminishes demand. That being the case, the central bank has held the key rate unchanged at 14.25 percent over its last five meetings.

“The adjustment of the conditions of the real economy have been significant and will contribute to the reduction of inflation,” Tombini said yesterday in a congressional committee. “In the same sense, the cooling of the labor market has intensified, serving to contain cost pressures in the economy.”

Brazil’s economy shed 1.75 million jobs in the 12 months through February, the labor ministry said yesterday. That was the worst 12-month result in the history of the data series beginning in 2003, according to Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc. February’s job losses were also more than double the median forecast from economists surveyed by Bloomberg.

“The labor market is expected to continue to deteriorate with the unemployment rate bound to reach double digits in the near term,” Ramos wrote in his report Tuesday, referring to the nationwide survey that will henceforth replace the institute’s six-city survey. The nationwide jobless rate averaged 9 percent in the fourth quarter of 2015.

In his speech on Tuesday, Tombini also cited reduced expectations for the currency’s depreciation as a factor helping to slow inflation. The real has gained 11 percent so far in March. Economists surveyed weekly by the central bank trimmed their 2016 inflation forecast for the second straight week, to 7.43 percent. They also expect borrowing costs to remain unchanged for the remainder of the year.

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